If you are are both an employee and an owner, then the general answer is that – whether you’re a founder or not – you can be terminated from the company as an employee, but you would remain a majority shareholder. As a majority shareholder, you’re entitled to BOD representation.
The reality is often more complicated than that since a thorough evaluation of all relevant documents is required. That includes your operating agreement (if you’re an LLC), shareholder agreements, stock option agreements, employment contracts, bylaws (if you’re a C-corp) and incorporation documents.
While a founder theoretically can be removed from management – regardless of their majority shareholder status – they can replace hostile BOD members with their own candidates. However, as I just mentioned, the realities are often much more complicated, requiring legal counsel to guide you through not just the morass of legalities, but also the business and political sensitivities that these situations almost invariably demand.
However, there are definitely steps you can take to shield yourself from a future possibility of being fired. For example, if you haven’t yet closed the deal on your Series A financing round, you’ll want to negotiate for more BOD representation. Of course, your investors are going to want to outflank you on this, and will press for representative advantage.
If you are in this stage of negotiations, you want to ensure plurality voting, which allows founders with majority common stock ownership to elect all common seats. If your investors are offering critical funding, they are going to demand an investor-leaning board at a minimum. This composition tends to resemble a 1-to-1 ratio of BOD representation between common stock owners and investors, with an independent seat as the wild card.
Since investors can take over a Board by filling the independent seat with an ally, you need to preempt this from happening. One way is by introducing a procedural mechanism that requires the independent to be selected only with unanimous consent of all BOD members.
If you haven’t yet entered into your Series A funding round, there’s much you can do to minimize this disruption. Ousting founders is fairly common, so you’ll definitely want to secure experienced legal counsel to help you draft the documents you’ll need to minimize any potential termination. Getting competent legal representation to help you draft the right documents with provisions to fortify your position in case this happens will save you more money and resources down the road since it is a pretty common occurrence.
I invite you check out LawTrades for more in-depth guidance tailored to your needs – whether you’re just starting out or are in jeopardy of being fired by an investor-controlled BOD.