First founders and investors can negotiate board provisions in the term sheet before a deal is complete. Other than investment terms, board control, board member nominations and board observer must be discussed and negotiated in order to avoid the influence.
The nature of the company’s stock offerings is modifiable by the founders. In consultation with legal advice, founders can designate classes of shares with “super” voting rights, which will enable a small number of shareholders to maintain effective control over the company while enabling new investors to purchase shares at a reasonable price. Negotiation of the pro-data rights gives the option to participate in future funding rounds and maintain relative share of the company.
By doing so, one would avoid being diluted by the new investors and keep your seat at the table. Establishing an anti-dilution clause could help manage the risk of losing control. Anti-dilution clauses protect from losing investment if the startup raises money at a lower valuation than the initial investment. It would help preserve the economic interest and bargaining power in the company, but they can also discourage other investors from investing in the company or lower its valuation. Make sure that prior to the incorporation, IP owned by an individual are completely transferred over to the corporation. IP developed after incorporation belongs to the corporation and not the individual who worked on creating it.
Limit the pre-emptive rights as it allows an investor to purchase more equity in future financing on a pro-rata basis. Founders would often opt for phased investments rather than a lump sum. This allows them to maintain control by only selling a portion of their company at each stage, rather than giving up a significant portion all at once.
Done By:
Sruthi Saravanan, Law student – University of Birmingham.