As a small business owner, if you are offering shares of equity to key employees, investors, or other company stakeholders, you need to be aware of the concept of voting rights and how they can help or hurt your vision of the business. Voting rights give power to the individual equity shareholders of a company to cast their vote on important decisions within a company. Major issues such as business policy, business funding, and operations are all items that can be affected by an individual’s vote.
How much voting rights to give to employees who get equity shares as part of their compensation package is more of an art than a science. You may choose to give a specific shareholder employee proportional voting rights, a diluted amount of votes, or no votes at all in company matters. Giving key employees equity shares without voting rights is common. Regardless, you need to be extra careful not to give too many voting rights away to shareholders if you have a clear and set vision on the way the company should operate. You don’t want a disgruntled employee to cast a deciding vote against your business plan years down the road.
However, in the opposite scenario, it is very fair to give large amounts of voting rights to key shareholders who truly are strategic partners in your business and vision. The voting alignment years down the road may prove to be an advantage. Overall though, it may be best to err on the side of caution when giving away voting rights that are attached to equity shares. It may be wise for the business owner to keep super-voting shares for themselves. These types of shares essentially give the owner complete voting control over the company.
A final point is that business owners don’t have much leeway with outside investors. Venture capital firms offering an investment to an entrepreneur almost certainly want to have voting rights in direct proportion to their investment. Since the investment amount is directly linked to the overall value of the company, it is difficult to skimp on giving outside investors their proper share of voting rights.