Raising capital is a major milestone for any startup, but itâs also a moment when founders risk losing control of their company. Understanding how founders lose control during fundraising is the first step in protecting your equity, influence, and long-term vision.
At Faison Law Group, we help founders retain authority over their startups by guiding them through critical legal and strategic decisions. Whether youâre negotiating your first seed round or preparing for Series A, we will show you how to keep founder control during funding, protect founder interests, and navigate the delicate balance between control vs. dilution in startups.
Why Founders Lose Control During Fundraising
Founders often enter negotiations focused on securing investment at the expense of preserving ownership and decision-making power. Unfortunately, once key terms are agreed upon, regaining control becomes extremely difficult. This usually happens during the first priced round.
Common Ways Founders Lose Control:
- Raising money at a low valuation
- Ceding too much board control
- Poorly structured vesting agreements
- Generous anti-dilution clauses
- Signing restrictive protective provisions
Understanding these pitfalls allows you to negotiate from a position of strength and avoid irreversible mistakes.
How to Keep Founder Control During Funding
Retaining control doesnât mean rejecting investment; it means structuring your deal wisely. Here are proven strategies to keep founder control during funding:
1. Maintain Voting Control as Founder
Your ability to make strategic decisions hinges on voting rights. To maintain voting control as founder, consider:
- Creating a new class of shares for founders only that have enhanced voting rights
- Selling equity when your company has momentum, otherwise you will need to offer up shares at a lower valuation, which means giving up more of your company to investors.
2. Negotiate Board Composition
The board governs your company, so who sits on it matters. In the early days of the company, the founders should control the board.
- Keep an odd number of board seats, in which the founders or founder nominees are the majority
- Not every investor gets a board seat, only the leader of the round
- Draft a voting rights agreement, where investors agree to support the founders nominees for the board.
3. Protect Equity Through Smart Vesting Agreements
Founders should negotiate vesting agreements to both align incentives with their cofounders and investors. The best tool to accomplish this is reverse vesting through a restricted stock agreement. With reverse vesting, founders initially receive full ownership of the stock, including all voting and economic rights, but they risk losing the stock if they leave the company before satisfying certain conditions.
- Co-founders: Life happens; co-founders leave the company for many reasons. Without reverse vesting, a departing co-founder could leave with a significant portion of the companyâs equity, despite no longer contributing. This scenario is damaging to the company, unfair to remaining co-founders, and unattractive to future investors.
- Investors: Aggressive investors will (i) try to make all of the co-foundersâ equity subject to vesting, and (ii) only permit âdouble triggerâ acceleration, where any outstanding equity vests if the company is sold AND the founder is fired. Founders should resist, and at worst, only agree to making a portion of the equity subject to vesting, and push for âsingle triggerâ acceleration, whereby any outstanding equity vests if the company is sold.Â
Best Practice: Reverse vesting with âsingle triggerâ acceleration.
4. Be Wary of Anti-dilution
This is a provision whereby investors are issued additional shares if the company later issues new shares at a lower valuation (a “down round”). The most investor friendly style is âfull ratchetâ while the best for founders is none at all.
- Reject full-ratchet protection. Push for none, but be willing to settle for broad based weighted average.
5. Negative Covenants
These are effectively âveto rightsâ given to investors. Founders cannot take these actions without the consent of the investors, no matter how much equity the founders have. Common negative covenants include:
- Selling or dissolving the company
- Buying a company
- Incurring debt over a certain threshold
- Increasing the number of authorized shares
- Create a new class of shares with equal or greater rights
- Changing the size of the board
- Amending the charter or bylaws
Best Practice: Increase the authorized number of shares BEFORE closing the round, increase the number of board seats that the founders MAY appoint, and push for a higher threshold before needing investor approval. Caution, in some states such as Delaware, franchise taxes are based in part on the number of authorized shares, which may result in higher taxes.
Final Thoughts: Secure Your Position as Founder
Raising venture capital doesnât have to mean sacrificing your voice or your stake. By focusing on how to protect founder interests, maintaining voting control, and carefully managing dilution, you can grow your startup while staying in charge.
At Faison Law Group, we specialize in helping founders negotiate smart, fair deals that align with their long-term goals.
Ready to Protect Your Role as Founder?
Whether youâre entering your first negotiation or preparing for a growth round, Faison Law Group provides expert legal support tailored to your stage and needs.
Contact us today to ensure your rights as a founder are protected throughout the fundraising process.