Part 3 Control Terms: Who Really Runs the Company?
Part 3 of the Part 5 Series explores the concepts relating to equity and control. Equity gets you ownership. Control gets you power. Know the difference.
You've agreed on the valuation. You've pushed back on preferences. The economics seem fair.
Then you hit the control section of the term sheet — and the power dynamics start to shift.
Because here's the thing:
You can own 60% of the company and still not be in control.
This is where term sheets subtly change the game for founders. Control terms are about who makes the decisions, who sets the direction, and who can say no or yes, even if you built the company from scratch.
Let's break it down.
Board Rights: The Real Power Table
The board of directors isn't just a formality as the governing body. It approves or blocks your most important company decisions. That includes:
Approving budgets
Hiring and firing C-level executives
Raising future rounds
Entering into M&A deals
Changing the company's strategic direction
In some cases… removing the CEO
While board control may not seem urgent at Seed or Series A, the moment things go sideways, it matters a lot.
What investors may ask for:
1 board seat for their firm
1 "independent" seat they help select (which may not be genuinely neutral)
Consent rights or veto power over who fills other board seats in future
This can quietly shift the power balance — even if they don't yet own a large share of the company.
What you want as a founder:
The majority of parity on the board until Series B or a significant scale
A neutral third party as the independent director — mutually agreed, not investor-appointed
A say in how the board evolves — so you're not boxed out as more investors join
Why this matters: once investors control the board, they can shape everything from who stays in the CEO role to whether you pursue an acquisition or push for another round. And if you ever hit a rough patch — which most startups do — the board can support or sideline you.
Founder tip: In the early stages, insist on a simple 3-person board:
1 founder
1 lead investor
1 independent director — jointly selected
Build a sunset clause so the board structure can evolve after Series B, a particular revenue milestone, or after raising a defined amount of capital. That way, you preserve agility early without hard-coding future constraints.
Reasonable Protective Provisions (Explained)
These protective provisions are designed to safeguard the investor's capital in high-impact scenarios and decisions that could materially alter the company's future or the value of its investment.
As a founder, these aren't inherently bad — many are fair and standard. The key is understanding them, negotiating their scope, and ensuring they don't creep into operational territory.
1. Issuing New Equity or Debt
"You must get investor consent before raising more money or taking on loans."
Why it matters: Issuing new equity dilutes existing shareholders, and taking on debt adds repayment obligations and risk. Investors want a say because both can dramatically affect the company's financial health and their ownership stake.
Founder tip: Negotiate thresholds (e.g., "Only equity raises above $500K or debt facilities above $250K require approval") to avoid needing consent for small bridge rounds or working capital lines.
2. Amending the Company Charter or Articles of Association
"You can't change the legal foundations of the company without investor sign-off."
Why it matters: The charter (in the U.S.) or Articles of Association (in the UK/Commonwealth) is the company's legal DNA — it defines share classes, voting rights, board powers, and more. Changing it could strip investors of protections or alter governance in ways they didn't agree to.
Founder tip: This is a fair ask. But make sure investors can't unreasonably block minor administrative updates — like changes to comply with local company law or to add new option pool terms.
3. Approving a Merger, Acquisition, or Sale (M&A)
"You can't sell the company without investor consent."
Why it matters: This is a huge deal — both literally and legally. M&A affects everyone's equity, status, and outcomes. Investors don't want to be forced into a fire sale or founder-led exit that doesn't deliver returns.
Founder tip: Negotiate thresholds: require approval from most preferred shareholders, not a single investor. This prevents one party from blocking an otherwise great deal.
4. Declaring Dividends or Distributions
"You can't pull money out of the business without approval."
Why it matters: Dividends are rare in early-stage startups, but in the event of unexpected profits, investors want to ensure cash is reinvested for growth, not distributed prematurely.
Founder tip: This is reasonable—but clarify that it doesn't block normal payroll, expenses, or milestone-based founder bonuses, which should be handled through your board or compensation committee.
5. Winding Up or Liquidating the Company
"You can't shut down the company without our input."
Why it matters: If the company is going to close due to insolvency, asset sale, or strategic decision, investors want to ensure that assets (like IP or tax credits) are accounted for and that the wind-down is handled responsibly.
Founder tip: Agree to this provision, but make sure it includes reasonable terms around board consultation and a timeline to act if the business is insolvent — you don't want a delayed investor response to drag things out.
Side Note: How to Make These Work for Everyone
Group approval is better than individual vetoes
→ "Approval by a majority of Series A shareholders" is fairer than "consent of Investor X".
Add materiality thresholds
→ Set a minimum dollar or dilution % level before consent is triggered (e.g., equity raises > $500K, debt > $250K).
Include response timelines
→ Investors must respond within X days so approvals don't stall operations.
What the Data Says
According to the HSBC Innovation Banking 2025 Term Sheet Guide:
Board representation is typically introduced at Series A, not pre-seed or seed, and founders still maintain a majority at earlier stages.
Founder vesting remains common, but time served is increasingly credited — particularly in sectors like AI and FinTech, where founders have higher leverage.
Investors are more open to founder-friendly board structures where performance and governance are clearly separated.
In other words, the market has matured — and so should your understanding of control.
Final Thought: Founders Need Power, Not Just Ownership
Absolutely — here’s your “Final Thought” section rewritten in a more narrative, story-driven tone that stays true to your founder-first voice:
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🧠 Final Thought: Ownership Feels Good. Control Builds Companies.
Founders often celebrate the percentage of equity they hold after a funding round. And fair enough — that number matters. But here’s what no one tells you:
A term sheet might not take your shares, but it can quietly take your power.
And when you’re in the trenches — building products, making hires, reacting to the market, fighting through the chaos — it’s not just how much you own that counts. It’s whether you have the authority to act.
To decide.
To lead.
To move.
Control terms aren’t about ego. They’re about execution and ensuring you can still steer the ship when the weather changes — not just sit and watch from the deck.
Because at the end of the day, no one else will protect your seat at the table.
That’s your job.
So read the terms.
Understand the dynamics.
Negotiate like someone who plans to stay in the driver’s seat.
Your vision deserves that much.
Next Up:
Part 4 — The Fine Print: What Else Is Buried in the Document?
We'll unpack the hidden costs, fees, ESG clauses, and legal obligations that are often overlooked—and how to avoid getting burned.
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