> what authority do they have

Board seats, which are often a condition of investment at series A and later rounds.

That still requires majority vote of board members which implies you've sold at least 50% of your company.

YC gets 7%, they have zero power to make you do anything.

Selling enough company that you loose 50% control is such a rare thing that it's not relevant to what most founders will experience.

> That still requires majority vote

This presumes open and direct confrontation, which means the relationship is going bad, and which I’d speculate most people would rather avoid. You’re forgetting a bunch of things, like what the investment terms might say about it, what your reputation is going to be down the road, all the ways people can apply lots and lots of pressure, how important networking can be, and the fact that in some cases the investor is providing other resources and/or might be the gateway to future investment. Getting to a place where you’re openly ignoring your investors and calling for a board vote to overturn them is a last resort, and is playing Russian roulette, not the first thing to try if there’s disagreement about their advice, right?

It doesn't require selling 50%. You can sell less than 50% of your company and still have the board majority controlled by investors, because those were the terms of the preferred investment.

If I'm not mistaken, YC takes a 7% at the seed stage, then the SAFE bumps it to around 15-20% on the next fundraise? From that, they're diluted down in subsequent rounds is what I presume.

Board control and share control are two different and competing things, with the board generally trumping shareholders.

The board is not controlled by shareholders. The board has a fiduciary responsibility to act in the best financial interest of the shareholders as a whole. But they (the board) essentially have full authority to decide what that means to them. Shareholders are effectively powerless outside of court, except for whatever power a board intentionally briefly concedes to them.

But YC doesn’t equal a series A, it’s a seed funding round

Right. I’ve never heard of someone losing control of their company at the seed stage. It’s always after later rounds.

I've seen it happen, with a seed round dragged out over years in multiple tranches. The company was poorly performing, never even came close to its projections, ran out of money, and was desperate.

It's definitely possible. Example: gumroad. I don't know the whole story, but basically at one point they couldn't raise more VC money, so they scaled down (read: fire people) and made it at least moderately profitable.

But it's exception, not the norm.

Gumroad is a major exception. They fired almost everyone and took on part time contractors instead.

They’re an exception because VCs pressure funded not to do what Sahil did. All investors wanted him to shut it down and do something else.

> If VCs don’t own a majority stake what authority do they have to make you chase such huge returns at the cost of a stable and profitable business?

Disputes with investors about the direction of the company are rare. Disputes about how exactly to aim that direction happen often. In my own experience, VCs and large investors have this leverage:

* Future investment. A major investor pulling back or not participating in the next round usually will result in worse terms, lower valuations or, the round not happening.

* Legal issues. Investments come with terms and conditions, and they are rarely, here's $5m, do what you want.

* Restructuring. From time to time, you need to have investors be on board with restructuring debt or the company. If you are at odds with a major investor, they are a whole lot less likely to be helpful.

* "We'll make it hard for you" Everything from investing in competitors, to introducing key people to job opportunities to guiding customers elsewhere. Yes they have a fiduciary duty, but when they think that duty requires management to change direction, things can get ugly.

Finally, investors talk to each other, and you piss one off, and they will poison the well with many others.

edit: my comment on SAFEs was wrong

This is true of most debt instruments but explicitly not SAFEs, which do not have an interest rate.

VCs won’t invest if they know this is your plan? If you lie to them and keep going for 500k, they can sue you for scamming (or whatever legal term is).

"I initially planned to scale but eventually realized the company wouldn't make enough to survive, as happens to most startups. I chose to scale down and make the company profitable instead of killing it." Could the VCs really argue against that in court? It's well-known that most startups fail without any scamming.

I don't think you even need to go to court over this. If you have a reasonably good relationship with your VCs you can just offer to buy them out with a small premium on their investment. They see how the business is going too and most are not looking to hold you on their portfolio forever for no reason.

It seems like VCs will often sell shares for a near-total-loss on their investment, for simplicity and relationship with founders, and they can write it off[0].

[0] https://www.youtube.com/watch?v=XEL65gywwHQ

Making fraud your retirement plan seems unwise, even if there's a chance you'd get away with it.

How is there any fraud here? You took seed money, built a profitable company and it just can’t scale to a unicorn. That isn’t fraud and no court would consider it as such

How is it not fraud to initially represent to investors that you plan to scale to the moon while planning all along to later say that you decided it wasn't going to work out?

What your mental plan is doesn't matter though, as long as you actually made a reasonable effort towards what the VCs expect. Or does anyone actually tell them "invest in me because I'll overtake Nvidia or die trying"?

I guess the person taking the VC deal isn't actually against getting filthy rich if they have a chance. If you say "I think this can get big", burn cash and work hard for a while, then recognize the moment where it's not sustainable anymore and scale down, then you did what was expected.

>What your mental plan is doesn't matter though

Of course it does. It makes the difference between being wrong and being a liar.

>I guess the person taking the VC deal isn't actually against getting filthy rich if they have a chance. If you say "I think this can get big", burn cash and work hard for a while, then recognize the moment where it's not sustainable anymore and scale down, then you did what was expected.

But if at the time you said that you actually neither believed it could get big nor intended to try to make it big, you've committed fraud even if the ultimate outcome is expected.

Former Silicon Valley lawyer here. It would be very difficult for a VC to win such a case, and it would almost certainly not be worth it for them given the amount of damages at issue.

It would also hurt their reputation by making it seem like they got duped by some founder.

>If you lie to them and keep going for 500k, they can sue you for scamming (or whatever legal term is).

They'll just boardroom coup you and replace you with someone who will hyperscale up.

Again, this requires them having a majority stake and we’re discussing YC which is a seed round. The current company I work at is YC backed and the founder still controls 85% of the company