Securing investment is often a crucial step in growing a business. However, alongside the capital needed to support growth comes the question of control.
Founders want the freedom to execute their vision, while investors will seek safeguards to protect their investment. Striking the right balance between these interests is a key part of any successful fundraising process.
Ownership, governance and control
How much equity you give to investors will depend on the circumstances of your business, your growth plans and the expectations of the investor.
You need to ensure that you do not give too much equity away early on, as your shareholding will be diluted further in future investment rounds, and you will want to retain a meaningful stake in your company upon exit.
Most founders give away somewhere between 10-20% of their share capital.
Generally speaking, the more shares or equity you own, the more power you have as a shareholder.
Shareholder power is exercised by the majority, so if you own more than 50% of the shares in your company, then you can take most decisions apart from a few corporate actions (such as changing the company’s articles of association) which require a 75% majority.
Most routine decisions are taken by the directors rather than the shareholders and so making sure you have control of the board of directors is essential.
Having an investor on the board can offer strategic insight, industry knowledge and valuable connections that can drive growth, in addition to providing future capital. However, it can also result in greater oversight and a shift in control.
Balancing investor protection and founder control is a negotiated compromise. The goal is to align incentives rather than create operational gridlock.
The tension between these two forces is primarily managed through bespoke shareholder agreements, articles of association, and specific voting thresholds.
Understanding how these protections and controls are negotiated can help both founders and investors establish a governance framework that supports growth while managing risk.
The founder’s perspective
Early stage startup boards are founder-heavy, but post-fundraising, investors will push to have their own directors on the board. The presence of "board observers"—who lack formal voting rights but hold significant influence over strategic discussions—is a heavily negotiated mechanism that founders must navigate.
You will want to maintain voting control and day-to-day operational freedom to ensure investors do not unduly influence strategic decisions. You can do this by:
- Issuing different classes of shares where "founder shares" carry enhanced or multiple voting rights per share compared to "investor shares".
- Ensuring the board of directors remains founder controlled. Investors will often demand a board seat, but founders may seek to retain a majority of board votes to allow the company to operate effectively on a day-to-day basis.
- Drag-along and tag-along rights protect both parties. Drag-along rights mean if the majority of shareholders agree to a sale, they can force the minority to sell as well. Tag-along rights allow minority investors to "tag along" and sell their shares if a majority shareholder sells theirs, ensuring they aren't left behind.
- Pre-emption rights, being the legal right for existing shareholders to purchase newly issued shares before they are offered to outsiders, thereby helping to prevent unwanted dilution of their control.
It is also important for the investment agreement to address what happens if a founder leaves or is forced out, including whether they are classified as a "good leaver" or a "bad leaver," as the determination carries immense financial and equity consequences.
The investor’s perspective
From an investor’s perspective, the aim is to protect their investment and manage risk.
Investors—particularly Venture Capital (VC) or Angel investors—do not usually take outright majority ownership in early-stage UK companies. Instead, they rely on specific veto rights and protective provisions to block fundamental changes to the business
Investors, via negotiation the shareholder agreements and articles, tend to aim to secure:
- Consent and veto rights
Negative control / veto rights that block the company from taking specific actions without investor approval, such as:
- Changing the nature of the business;
- Selling the company;
- Initiating liquidation/insolvency;
- Issuing new shares;
- Incurring large debts;
- Selling material intellectual property; and
- Hiring, firing, or significantly altering the compensation of senior management or founders.
As a founder, you will be pushing to narrow these lists to avoid administrative bottlenecks, while investors will seek protections against unilateral decisions that could damage value. You need to have the decisive vote for operational decisions.
Board representation is the most direct way for investors to participate in corporate governance and monitor operations.
At Seed Stage, early-stage founders typically maintain a majority of board seats. Smaller investors often negotiate for non-voting Observer Rights rather than formal board seats to reduce governance burdens.
For Series A and beyond, board seats are negotiated to roughly reflect equity percentages. The norm is often parity (e.g., two founder directors and two investor directors, with a mutually agreed independent director to break potential ties).
Investors want board representation to gain deeper insights into company performance and ensure their interests remain aligned with those of the business.
- Information Rights
Investors will often require regular reporting to track their investments and meet their own reporting obligations. As shareholders do not automatically have vast access to corporate information under the Companies Act 2006, these rights are contractually built into the investment documents.
Investors typically require:
- Unaudited monthly or quarterly management accounts, alongside annual audited statutory accounts;
- Regular founder updates (KPIs, cash runways, and major commercial wins/losses); and
- The right to inspect the company’s books, records, and facilities (usually with reasonable notice).
Founders tend to want to limit reporting to concise, automated updates to save time, whereas investors often seek more detailed financial visibility.
- Anti-dilution protection
Anti-dilution clauses protect investors against the value of their shares being heavily diluted if the company later issues shares at a lower valuation.
- Liquidation preferences
These clauses dictate that, in the event of an exit, investors receive their money back first before any remaining proceeds are distributed to founders.
Aligning interests for long-term success
Ultimately, successful investment relationships are built on alignment. The right governance structure should give investors appropriate protections while allowing founders the flexibility to grow the business and deliver its vision.
By addressing these issues early, founders and investors can establish clear expectations, reduce the risk of future disputes and create a framework that supports long-term success.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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