One of the most important questions that novel entrepreneurs ask when they are about to open a company is the difference between board members and shareholders. What are their respective attributions and obligations? Should I be a board member or a shareholder? Can someone be both?
Let’s try to explain this difference in colloquial terms.
What are their respective attributions and obligations?
Shareholders are the ones owning the shares of the company. That gives them control over the company. A share of the company is a fraction of the share capital, that defines the ownership of the company. As you may know, the minimum share capital for a company in Estonia is 2500€.
If there is a party that owns more than 50% of the shares of the company, that party is said to control the company.
For example, if a company has 2500€ in share capital and three shareholders:
- John, with 1000 shares of 1€ each, totaling 1000€ of share capital.
- Anna, with 800 shares of 1€ each, totaling 800€ of share capital.
- Simon, with 700 shares of 1€ each, totaling 700€ of share capital.
Then, we can affirm the following:
- John has 40% of the shares, Anna 32% and Simon the remaining 28%.
- No party controls the company alone. That means at least two of the three friends need to agree on something for a resolution to be approved.
- When they pay the share capital, John will have to pay 1000€, Anna 800€, and Simon 700€.
- If they distribute dividends, they will be distributed according to the percentage of ownership of the company. So for 100,000€ of dividends, John will receive 40,000€, Anna will get 32,000€ and Simon 28,000€.
The shareholders are the ones taking the “long term” decisions of the company. They don’t make the daily decisions of the company, this is the task of the members of the board. However, they can hire or fire these board members if they agree in an official meeting.
The board members, on the other hand, take all the short term decisions of the company. They take care of the daily activities, firing or hiring employees, getting into an agreement with a provider, signing strategic partnerships, etc.
There can be multiple members of the board. In startup terms, you can consider the CEO, CTO, CMO… as board members. They make decisions in their respective fields.
Can someone be both?
Of course. That’s indeed the most common situation for small and middle-size companies.
If you are the only member of the company, you will be the only shareholder and the only board member of the company.
Should I be a board member, a shareholder or both?
That’s a very personal decision. If your company is small, founded by maybe just three friends, the most common situation is that all of you are board members and own one-third of the shares. Of course, different shares arrangements, like the ones explained before for John, Anna and Simon, are possible.
Of course, some of you may want to be shareholders while others are just board members of the company. The shareholders, if they are not board members, will not participate in the daily activities of the company. On the other hand, the board members that are not shareholders need to understand that they don’t own any shares of the company, so they are basically employees in control of the daily operations of the company.
Take into account that every company needs one board member and one shareholder at least.
As an example, think about Steve Jobs. He founded Apple with Steve Wozniak, and he was both a shareholder and board member. In the beginning, only they had shares of the company. However, when investors started coming to Apple, Steve had to sell some of the shares of the company in exchange for the investors’ money, so he diluted his own shares (had less control of the company because he sold some of his shares to the investors).
Then, it got to a point where the rest of the shareholders had more shares combined than him. Sometime later, for diverse reasons, these shareholders did not want Steve Jobs as the CEO anymore, so they fired him. Even though Steve Jobs was taking all the decisions of the daily activities of the company, he was fired as the board member of his own company because he had lost control of the company (shares).
Then he was re-admitted again years later, but that’s another story…