I just finished reading Zero to One: Notes on Startups, which is a good read not only for those interested in or working on their own startup but also for lawyers representing startups. One of the things author Peter Thiel mentions is the distinction between ownership, management and control. This distinction is key for any corporate lawyer and something which I try to teach early on to junior associates.
What Does Ownership Mean?
Ownership means who owns stock in a corporation or who are the stockholders. Initially, ownership is limited to the founders of a startup but over time, the owners expand into new hires and investors. Stockholders have certain rights as owners of the corporation as provided by the state laws of the corporation’s state of incorporation and the corporation’s organizational documents. As lawyers, we should be aware of all the rights afforded to stockholders by virtue of their ownership of stock, for example, information rights. Ownership however does not always translate into influence over the corporation (see Management and Control below).
What Does Management Mean?
Management means who has the ability to make daily business decisions for the corporation or who are the officers and key personnel in a corporation. Management makes a plethora of decisions which impact the operations of a corporation, however, they are limited from taking certain key actions by those who exert control (see Control below). As lawyers, we should be aware of the distinction between management and control in order to properly advise management when they need to seek approval prior to taking certain actions.
What Does Control Mean?
Control means who has the power to effect important changes for a corporation. Control is held by two groups, the board of directors and the controlling stockholders. The board of directors is empowered with the responsibility to oversee the activities of a corporation. There can be overlap with the board of directors and management as certain officers like the CEO or President may also sit on the board of directors, however, that officer cannot act unilaterally to effect change. There is also overlap between controlling stockholders and owners of a company. The distinction between ownership and control is that not all owners can exert control over the company. As lawyers, we must determine which stockholders are in fact controlling stockholders based on their individual or combined percentage holdings of the company. Keep in mind, that it’s not always a test of who owns majority of the stock. Depending on what the corporation’s organizational documents or agreements say, a larger percentage approval may be required for certain actions.
Remember that Distinction between Ownership, Management and Control is Fluid
Knowing the distinction between ownership, management and control is key to advising your corporate clients on how to take actions. Just remember that the composition of each group is subject to change based on new stock issuances, capital raises and appointments to officer/director roles.