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Knowledge Base: Control in startups: Understanding the stakeholders & voting rights

Last updated
11th March 2025

Founders considering external funding sources often worry about the impact of investment, particularly the potential loss of control over a business they have spent years building.

Conversely, investors may be concerned about making a significant financial commitment without having any oversight or involvement in the business.

Typically, early funding rounds involve modest investments from friends, family, or angel investors, with relatively straightforward control mechanisms. However, later-stage rounds and larger investment sums generally attract more demanding investors who provide substantial funding in exchange for greater control over business operations.

In this article, we’ve broken down:

FounderCatalyst paperwork

We built this paperwork using the BVCA (British Private Equity & Venture Capital Association) standard documentation, which is the most commonly used investment paperwork in the UK.

Some elements of the BVCA paperwork are heavily VC-focused. We have removed many of these elements, as our customers typically receive investment from angels, angel networks, crowdfunders, SEIS funds, or junior VCs. Additionally, the standard BVCA paperwork is not inherently compatible with SEIS/EIS. To address this, we have added wording to reflect these schemes.

Investment paperwork can range from being founder-friendly to investor-friendly, or it can strike a balance between the two. Naturally, extreme positions are not ideal. Founders would struggle to secure investment from experienced investors if the paperwork is excessively founder-friendly, as investors would likely walk away. Therefore, our approach encourages a balanced structure: investors receive market-standard rights and protections, while founders are safeguarded from problematic investors.

Governance stakeholders

The key stakeholders in your company's governance structure are:

Executive Directors

Directors serve as agents of the company, appointed by shareholders to oversee its daily operations. Often, they are also the company's founders and play a crucial role in shaping its strategy and decision-making. However, Executive Directors cannot act independently. They can, in certain circumstances, bear personal liability for any corporate misconduct and must adhere to the seven statutory duties outlined in the Companies Act 2006.

The FounderCatalyst platform requires a “Founder” to be a statutory director (find out more on platform roles here). This means that while you might have three founders in title, only two may officially be directors at Companies House. The third founder should be listed as a “Shareholder” on the platform.

Non-Executive Directors (NEDs)

NEDs are officially appointed at Companies House. They remain independent, with no executive involvement in the company. This means they cannot serve as managers or employees. Their impartiality allows them to assess challenges facing the founding team objectively, prioritise key issues, and make decisions that serve the best interests of the business rather than personal gain.

The Board

Every company is legally required to have a board of directors. In the early stages, the board often consists solely of the founders. Unless additional individuals are appointed as statutory directors, the board will typically remain founder-led.

Board Advisor

A Board Advisor can participate in board discussions without being a statutory director. If they are not formally appointed as a Director and do not behave as such, they are not bound by Directors’ Duties under company law. Unlike a Consultant, a Board Advisor is not required to deliver a specific product or solution; their role is to provide expert guidance. They can be engaged on an hourly basis to share insights and strategic advice on various business matters.

Board Observer

A Board Observer is typically a minority stakeholder or an Investor who wishes to remain involved in board discussions without assuming the legal responsibilities of a Director. Observers have the right to attend board meetings and access board-related information but do not have voting rights. Since they are not statutory directors (and provided they do not behave as such), they are not subject to the legal duties imposed on Directors under the Companies Act 2006.

Investor Directors

Investor Directors are formally appointed at Companies House and serve as Directors on the board. Like Executive and Non-Executive Directors, they are subject to the statutory duties outlined in the Companies Act 2006.

An individual must be explicitly granted the right to serve as an Investor Director in the investment agreement. This appointment gives the investor the authority to designate an individual to take a formal seat on the board, with full voting rights.

Investors often seek board positions to safeguard their financial interests. However, if the board consists solely of a Founder and an Investor Director, there is a risk that decisions may be driven by the investor’s personal interests rather than the company’s long-term success. To maintain balance and impartiality, appointing a Non-Executive Director can help ensure objective decision-making and prevent conflicts of interest.

Investors

Investors in a company can be either individuals or corporate entities, each with specific rights and protections outlined in the investment agreement. Their involvement can range from passive shareholding to active participation in strategic decision-making, often through Investor Directors.

Under UK corporate governance, key investment terms are typically set out in the Subscription and Shareholders' Agreement (SSA), which defines investor rights, obligations, and approval thresholds for certain decisions.

A critical aspect of investor rights is Investor Majority Consent, which refers to matters requiring approval from the majority of investors before proceeding. In the context of an SSA, Investor Majority Consent is typically defined as:

"The prior written consent of the Investor Majority, provided that an Investor will be deemed to have consented to the matter(s) in question if no response is received from that Investor (or its appointed Investor Director or other nominated representative) within 14 days from the date the request for consent was deemed to have been received in accordance with the Subscription and Shareholders' Agreement."

The Investor Majority generally refers to holders of more than 50% of the Investor Shares, which ensures that decision-making power remains with financial investors rather than the original founders.

Shareholders

Shareholders are individuals or entities that own shares in a company, granting them ownership and certain other rights, including voting rights and dividend entitlements. Their rights and obligations are typically set out in the Articles of Association and any applicable shareholders' agreement (or investment agreement).

Shareholders exercise control over company decisions through Shareholder Resolutions, which can be classified as:

While shareholders can influence key decisions, their involvement in daily operations is typically limited unless they also serve as directors. Their primary role is to safeguard their investment and ensure the company is managed in a way that delivers returns.

Voting rights in your company

There are three levels of voting in your company. Two of these are governed by the Companies Act, meaning they cannot be changed: Shareholder Resolution Voting and Board Voting. The third level of voting is defined in your Subscription & Shareholders’ Agreement, which is a contractual agreement and can be modified: Investor Consents.

1. Shareholder Resolutions

In a shareholder resolution, voting is based on 1 share = 1 vote. There are two types of resolutions:

In practice, most startup founders can pass these resolutions, as they typically hold more than 75% of the total voting shares.

Note: The company can create non-voting shares. These shares may have capital and/or dividend rights, but may not have a right to vote. Your investors may well push back if you try to allocate them non-voting shares though, as it is fairly unusual to do this.

2. Board Voting

The board consists of the company’s directors. Under the Companies Act, a simple majority (>50%) is required to pass a motion.

For example, if a startup has three co-founders who are statutory directors, at least two directors must vote in favour of a motion for it to pass.

3. Investor Consents

Investor consents are not part of the Companies Act. Instead, they are contractual agreements designed to protect investors and facilitate investment.

Investor consents typically ring-fence specific decisions.

Investor consents serve as a veto right, enabling investors to block certain actions that one would reasonably expect them to have a say on. For example, they could prevent you from transferring shares to a family member (14.1) or closing down the company. In practice, most of these decisions are approved without issue, as it is not in investors' interests to obstruct the business. However, this right provides them with specific protection against potentially damaging actions.

A good example is Clause 14.1 (screenshot further down the article) which prevents a co-founder from bypassing the leaver provisions in the Articles of Association by transferring shares to a third party.

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It is worth noting that founder shares are explicitly excluded from voting on Investor Consent matters.

Mechanisms investors can negotiate to have control / rights

Undertakings

An undertaking is a promise to do or not do something. An investor may, for example, insist that you include an undertaking to preserve SEIS tax relief - i.e. you won’t do (or not do) anything that would put this relief at risk. Breaching an undertaking could give rise to a breach of contract claim, so any undertakings that you or the company give should be taken seriously.

Shareholding percentages

As detailed above, a founder should be aware of certain rights that are afforded to shareholders that control certain levels of shareholding in a business. For example:

It follows that, if owners with 75% of the company can pass a particular motion, then shareholders with greater than 25% of the voting rights can block a motion.

Board appointment rights

Some institutional investors may insist on board appointment rights - the options are typically:

Step in / swamping rights

Sometimes in private equity investments, the parties agree to step-in rights or swamping rights. This right allows an investor to "step in" and take voting control of the company's board of directors and/or general meetings of shareholders. An investor’s right to ‘step-in’ would generally be limited to scenarios such as the company being (or being likely to become) in breach of banking covenants related to a loan, or the company being in breach of the shareholders agreement.

The step-in event is often temporary, allowing the investor to address the issue and to implement measures to prevent a re-occurrence.

Founder equity vesting

By default, founder(s) will expect to own 100% of their shares from day one in the business. In many cases, investors will expect to see shares vesting over time - so the shares are incrementally allocated to founders the longer they are with the business.

The investors will also expect different levels of equity to be retained by founder(s) depending upon the circumstances under which the founder leaves the company.

Pre-emption rights

Pre-emption gives an existing shareholder the right, but not obligation, to maintain their percentage shareholding in a company when the company is issuing new shares. This is a market standard term in any stage of investment but it does have implications for founders wishing to raise capital.

Investor consents

Also known as veto rights, ensure that the company seeks consent from specific investors, or a certain percentage of investors, before they can undertake certain actions. These actions may depend upon the circumstances, but typically include items such as:

Crucially, investor consents are a right conferred to a shareholder rather than a director of the company. Unlike board level control (via Step In / Investor Director mechanisms), which carry a fiduciary responsibility on the board and individual directors, investor consents are powers which aren’t subject to these rules.

Investor consents in the platform

In the ‘Advance round configuration’ in Step 1 Defining the round you can select investor consents as; None, Light, Full.

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Please click the links to see ‘Schedule 5’ in the Subscription & Shareholders’ Agreement which details the Investor Consent matters:

Regardless of the selection above, certain matters will require investor consent. These are considered market standard, and their absence could deter more sophisticated investors.

One key example of this is the further issuance and transfer of shares (Clause 14).

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Let’s examine Clause 14.1 to understand why it is included. Within the FounderCatalyst Articles, there is a reverse vesting mechanism designed to protect investors and other founders. This ensures that, if a founder leaves, they do not retain all of their shares. Instead, a portion of their shares will be converted into worthless deferred shares, as specified in the leaver provisions within the Articles. Imagine investing £200,000 in a company, only for a founder holding 40% of the business to walk away the next day without any ongoing contribution - this would be highly frustrating as an investor.

Clause 14.1 prevents founders from circumventing these leaver provisions by transferring their shares to another individual. Without this restriction, a founder could attempt to avoid the provisions by transferring their shares to a partner before leaving the company. Since the partner would not qualify as an "Employee" (defined as an individual, excluding any Investor, who is a director, employee, or consultant of the Company or any other Group member), they would not be subject to the leaver provisions. Clause 14.1 safeguards investors by ensuring they have the right to block such transfers, preventing founders from bypassing their contractual obligations.

Founders Beware: A cautionary tale

We spoke to one founder, not a FounderCatalyst customer, who ended up losing all control of their idea, and ultimately their business. With their permission, we’re sharing their (unidentifiable) story with you all – as a cautionary tale for all budding entrepreneurs, but with takeaways we can all relate to, and should listen to.

Founders Beware: A cautionary tale article

FAQs

Can an investor fire me?

The short answer is no.

The right of shareholders to remove a director by ordinary resolution exists by default under UK law under Section 168 of the Companies Act 2006. A director can be removed by a simple majority vote (50%) at a general meeting, with special notice (28 days).

The Articles do not explicitly grant the board the power to remove a director unless they meet the disqualification criteria outlined in the Articles: Disqualification of Directors

In addition to that provided in article 18 of the Model Articles, the office of a Director will also be vacated if they are convicted of a criminal offence (other than a minor motoring offence) and the Directors resolve that their office be vacated.

Investor Directors can have specific rights, so you should check your SSA if you have Investor Directors.

The Investor Consent impact:

Can an investor stop me issuing new shares?

If you select Investor Contents Light or Full, then you will require Investor Consent to issue new shares.

“Issuing Shares or Loans: The company cannot issue, buy back, or create shares, loans, options, or similar securities without following the agreed rules.”

Should I structure my paperwork to appeal to future investors (ie: VCs / series A)?

More sophisticated investors - such as VCs in later funding rounds - will require you to adopt their ‘in-house’ legal documents, and that paperwork will supersede your current paperwork. For example, when raising a Series A, the VC’s lawyers will provide their own terms, which is unlike angel rounds, where investors negotiate your terms. Therefore, there is no need to ‘future-proof’ your paperwork as it will almost certainly be replaced when you get to a series A round.

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