Before signing a term sheet, founders should weigh four things: dilution, loss of control, board influence, and the rights they're handing their investor. In our experience, it's the last of these — the use and misuse of minority shareholder rights — that causes the most friction, long after the money's landed.
For many founders, securing investment feels like a major milestone. Fresh capital can help you grow faster, hire key people, develop new products, or expand into new markets. It's often a sign that someone else believes in your vision and wants to back it.
But while most founders focus on what they're gaining, it's equally important to think about what they're giving up. In our experience, it's often the use, and misuse, of the rights an investor receives that causes a founder the most grief, not just the money or the board seat.
That's not a reason to avoid investment. The right investor can bring experience, connections and strategic support that can be just as valuable as the money itself. The key is understanding the relationship you're entering into before you sign on the dotted line.
Understand what you're giving away
Most investors will receive shares in exchange for their investment. This means your ownership percentage in the company will decrease, something commonly known as dilution.
When you're focused on raising capital, it's easy to concentrate on the amount of money coming in. However, it's just as important to understand how much of the business you're giving away in return.
A deal that feels reasonable today can look very different in a few years' time if additional funding rounds further dilute your shareholding. Before accepting investment, make sure you understand not only the immediate impact, but also how future capital raises could affect your ownership position.
Ownership doesn't always mean control
Many founders assume that if they remain the largest shareholder, they'll stay in control of the business. That's not always the case.
Investors often negotiate for voting rights or approval rights over certain decisions. These rights can give them significant influence, even if they own a minority stake. These are commonly referred to “minority rights”, “minority protections” or “reserved matters”.
These rights are not necessarily a bad thing. Investor oversight can bring accountability and valuable perspectives. However, founders should understand exactly what decisions they can make independently and where investor approval may be required. As we discuss below, these same rights are sometimes used well beyond their original purpose, turning a protection into leverage.
Board seats matter
It's common for investors to request a seat on the board.
In many cases, this can be hugely beneficial. Experienced investors can provide strategic guidance, industry knowledge and access to valuable networks.
At the same time, board members play an important role in the governance and direction of a company. Giving an investor a board seat means giving them a direct voice in key decisions.
Before agreeing, founders should consider what the board will look like after the investment and whether that structure will continue to work as the business grows.
Check the fine print around key decisions
Investment documents often include a list of decisions that require investor approval, being the minority protections noted above.
They might include things like issuing new shares, founder salaries, business expansion, taking on significant debt, approving annual budgets, selling major assets or changing the nature of the business.
These protections are a normal part of many investment deals and are often entirely reasonable. However, if they're too broad, they can create unnecessary delays and make it harder to move quickly when opportunities arise.
The goal is to strike a balance between protecting investors and allowing management to run the business effectively.
When minority rights become a weapon
In our experience, it isn't dilution or a lost board seat that causes founders the most grief, it's the use, and abuse, of minority rights.
Rights that exist to protect a minority investor can just as easily be turned into leverage. A veto over a routine budget, founder salaries, business expansion, or a vaguely worded consent requirement can be used to stall decisions, extract concessions, or hold a founder hostage on matters that have nothing to do with what the right was meant to protect.
This is not a reason to refuse minority protections outright. Investors are entitled to reasonable safeguards. But founders need to go into any raise with their eyes open: who exactly are you taking money from, what rights are you giving them, and how could those rights be used if the relationship turns sour?
Before signing anything, ask what happens if a right is exercised unreasonably, who resolves a dispute if the parties can't agree, and whether there's a mechanism to break a deadlock. Founders who skip this step often find out the hard way, usually at the worst possible time.
Discuss exit expectations early
Not every investor wants the same outcome.
Some investors may be looking for a relatively quick exit, while founders may be focused on building the business over the long term. Neither approach is right or wrong, but misaligned expectations can create tension later on.
Having open conversations early about growth plans, timeframes and what success looks like can help avoid surprises down the track.
Put it in writing
One of the most important documents in any investment deal is the shareholders' agreement.
A good shareholders' agreement clearly sets out how decisions will be made, the rights and obligations of shareholders, what happens if disputes arise, and how future exits will be managed.
It may not be the most exciting part of raising capital, but it's often where future problems can be avoided.
Summary
Bringing in an investor can be a powerful way to accelerate growth and take your business to the next level. But investment is about more than money. It's about ownership, decision-making and entering into a long-term relationship with another stakeholder. Choosing the right partner — and understanding exactly what rights you're giving them — matters just as much as the capital itself.
The best investment relationships are built on clear expectations and good alignment from the outset. Taking the time to understand the terms of the deal before signing can help ensure both founders and investors are set up for long-term success.
Looking for advice before taking on a new investor? Get in touch with our experienced corporate and commercial team today to find out how we can support you through the process and protect the integrity of your business.