Not all control comes from shareholding.
For founders intent on scaling beyond the limits of organic growth, there often comes a point where internal resources are no longer sufficient. At that stage, the focus shift towards external capital as means of accelerating expansion.
More often than not, the primary concern for founders in the process is dilution: How much of the company must they give up in exchange for growth?
In practice, however, dilution is rarely the real issue. The overlooked risk usually proves to be costlier – gradual loss of control.
It is not unusual to see founders who retain majority stake in their companies, yet are unable to make key decisions without investor approval. This issue arises because ownership and control, while goes hand in hand, are not the same.
Distinction between Ownership and Control
While the notions of ownership and control are related, ownership does not equal control.
Simply put, shareholding reflects the financial stake in the company. Control, on the other hand, is about decision-making power in the day-to-day operations of the company, ultimately determining the direction of the business.
Understanding this distinction is critical before entering into any fundraising exercise or onboarding a new investor.
A shareholder is an owner of the company. Their primary interest is economic i.e. entitlement to dividends, capital/asset appreciation, and voting rights on certain reserved matters such as the appointment of directors or approval of major corporate actions.
A director, on the other hand, is responsible for managing the business and affairs of the company. Directors make operational and strategic decisions and are subject to statutory and fiduciary duties to act in the best interests of the company as a whole.
In the context of fundraising, investors typically enter as shareholders but often negotiate for the right to appoint directors or nominate board representatives. Through board participation, they gain influence over the company’s decision-making processes, which are sometimes to a greater extent than their shareholding proportion. Conversely, founders who retain majority shareholding but relinquish significant board control may find themselves with limited practical authority over the business.
Understanding the difference between ownership and management is therefore key. Shareholders own the company, but it is the board of directors that runs it.
In structuring investments, careful consideration should be given not only to equity distribution, but also to board composition and governance rights as these ultimately determine where control resides.
How Control Is Actually Given Away
Typically, control is diluted gradually through a combination of legal and structural mechanisms, one clause at a time.
1. Board Composition
The board of directors is where strategic and operational decisions are made. If investors are granted the right to appoint majority of directors, or even equal representation with casting votes, practically, this means that effective control no longer resides with the founders despite retaining majority stake in the company.
2. Reserved Matters and Veto Rights
Investors typically require certain decisions to be subject to their consent. These “reserved matters” often include approval of budgets, major expenditures, issuance of new shares, or changes to business direction.
While such protections are commercially reasonable, overly broad or vaguely defined veto rights can significantly restrict a founder’s ability to operate the business independently.
3. Shareholder Voting Thresholds
Matters requiring special resolutions i.e. 75% approval thresholds, can give minority investors blocking power over key decisions, even where founders holds a majority.
4. Exit or Cash-Out
In an exit or cash-out situation, economic rights may influence how value is ultimately realized. In some cases, founders may have built and led the company to listing, yet find that their financial upside is more limited than expected due to the rights given out earlier.
5. Lock-ins and Restrictions
Vesting schedules, non-compete clauses, and other contractual obligations can further constrain founders, particularly if not carefully negotiated.
Where It Goes Wrong
In many instances, founders do not intentionally relinquish control. Instead, it is conceded through a series of seemingly reasonable compromises.
A common mistake is focusing primarily on valuation. Securing a higher valuation may feel like a win, but if it comes at the expense of extensive control rights, the long-term implications can be dire.
Another frequent issue is the acceptance of broad or undefined reserved matters. Clauses requiring “investor consent” without clear parameters can create uncertainty.
Founders also tend to overlook potential future fundraising rounds. Each round introduces new investors and potentially new layers of rights, further diluting control if not carefully managed from the outset.
Finally, there is often an assumption that certain terms are “market standard” and therefore non-negotiable. In practice, most terms are negotiable to some extent, particularly where there is alignment on the commercial objectives of the parties.
Structuring for Both Capital and Control
Raising capital does not have to come at the expense of control. With the right approach, both can be aligned.
Founders should begin by identifying the decisions that are critical to retain, typically, the heart of the company’s strategy and operations.
Reserved matters should be carefully scoped and limited to fundamental structural issues, rather than extending into day-to-day management. Clarity and specificity are key.
Board composition should also be considered strategically. Maintaining a balanced board, or avoiding automatic investor majority, can help preserve meaningful influence over decision-making.
Importantly, fundraising should be approached with a forward-looking mindset. Early-stage concessions may have compounding effects in subsequent rounds, and control dynamics should be considered across the company’s growth trajectory, not just at a single point in time.
The Commercial Reality
In many deals, control is not “taken” or “conned” from founders, but rather, it is gradually given away, one clause at a time.
The impact of these provisions often only becomes apparent after completion, when founders find themselves needing approval for decisions they once made independently.
Conclusion
Capital is essential for growth, but it is only one side of the equation.
Poorly structured control arrangements can hinder execution, slow decision-making, and create misalignment between founders and investors. On the flip side, a well-balanced structure enables both parties to contribute effectively with investors providing oversight and capital, and founders retaining the autonomy needed to build the business.
About the authors
Laurel Lim Mei Ying
Senior Associate
Capital Markets, Corporate and M&A,
Commercial and Regulatory Compliance
Halim Hong & Quek
laurel.lim@hhq.com.my
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