Raising the first serious round of external capital is a milestone. It is also the moment a private company stops being run purely on trust between founders and starts being run on a written constitution. That constitution is the shareholders’ agreement. Most founders spend months negotiating valuation and only days negotiating the agreement that will govern how the company is controlled, how decisions are made, and how everyone eventually exits. In practice, the second conversation matters far more than the first.

A lead investor changes the dynamic in a specific way. The lead sets the price, sets the structure, and writes the template that every other investor in the round will sign up to. Whatever is conceded to the lead becomes the market standard for that company forever. Getting these terms right the first time is cheaper, faster, and far less damaging to the relationship than trying to renegotiate them two rounds later.

Start with the term sheet, because the real negotiation happens there

By the time a long-form shareholders’ agreement is circulated, the commercial terms are usually already settled. The term sheet is short, mostly non-binding, and deceptively casual — and it is where control, economics, and exit rights are actually decided. Treat it as the main event. Every clause in the term sheet should be tested against a simple question: what does this allow the investor to do that we cannot stop, and what does it stop us from doing without their consent?

Founders should also resist the temptation to sign a term sheet quickly to lock in the valuation. Exclusivity periods, break costs, and conditions precedent all sit in that document. A high valuation attached to a restrictive structure is often worth less than a lower valuation on clean terms.

Be clear about the capital structure before you argue about price

Valuation is meaningless without the capital table that sits underneath it. Confirm whether the price is pre-money or post-money, whether the employee option pool is created before or after the investment, and who is diluted by it. A pool created out of the pre-money valuation is funded entirely by the existing shareholders, which quietly reduces the founders’ effective price per share.

The same discipline applies to instruments. Ordinary shares, preference shares, convertible instruments, and any outstanding advances from earlier friends-and-family rounds all need to be converted, cleaned up, and reflected in a single agreed capitalisation table before signing. Unresolved legacy paperwork is the most common cause of delay in closing a round.

Control is decided by the board and the reserved matters list

Two provisions determine who really runs the company. The first is board composition: how many directors each side appoints, who chairs, whether the chair has a casting vote, and what quorum is required for a valid meeting. If the investor director must be present for a quorum, that director holds an effective veto over every board decision, regardless of voting numbers.

The second is the list of reserved matters — decisions that cannot be taken without investor consent. A reasonable list protects the investor against value-destroying actions: issuing new shares, taking on significant debt, selling the business, changing the nature of operations, related-party transactions, or altering share rights. An unreasonable list creeps into ordinary operations: hiring decisions, budget line items, routine capital expenditure, or customer contracts above a low threshold. Founders should negotiate the thresholds, not just the categories. A consent right that bites at a low value effectively transfers day-to-day management to the investor.

Understand the downside economics: preference and anti-dilution

A liquidation preference decides who gets paid first when the company is sold. A one-times non-participating preference is the widely accepted middle ground: the investor takes back their money or converts to ordinary shares and shares in the proceeds, but not both. Participating preferences and multiples above one times can leave founders and employees with very little in a moderate exit, even one that looks successful from the outside. Model the outcome at several sale values before agreeing to anything — the difference between structures only becomes visible in the numbers.

Anti-dilution protection adjusts the investor’s shareholding if a future round is priced lower. Broad-based weighted average adjustment is balanced and standard. Full ratchet protection shifts the entire cost of a down round onto the founders and the team, and often makes the company harder to finance later, because the next investor sees a distorted cap table.

Founder commitments cut both ways

Investors will ask founders to commit to the business through vesting or lock-in arrangements, non-compete undertakings, and assignment of intellectual property to the company. These are reasonable requests: the investor is buying the team as much as the business. The negotiation should focus on fairness rather than principle. Ask for credit for time already served, define good leaver and bad leaver outcomes clearly, and keep restrictions proportionate in scope and duration. Vague definitions of cause for termination are where disputes begin.

Transfer rights determine who you end up in business with

Restrictions on transferring shares protect everyone, but each one should be understood on its own terms. A right of first refusal gives existing shareholders the first opportunity to buy shares before they are sold to an outsider. Tag-along rights allow minority shareholders to join a sale by the majority on the same terms — this is a protection for founders as much as for investors. Drag-along rights allow a defined majority to force everyone else to sell.

Drag-along is the clause to read most carefully. Negotiate the threshold that triggers it, whether founder consent is required, and whether a minimum price or return applies. A drag-along that can be triggered by the investor alone, at any price, is a right to sell the company over the founders’ objection.

Information rights, exit expectations and dispute resolution

Investors are entitled to know how their capital is performing. Agree a realistic reporting package — monthly management accounts, quarterly board reporting, an annual audited financial statement and an approved budget — and then meet it consistently. Reporting discipline builds credibility for the next round, and companies that report well raise money faster.

Exit expectations should be written down rather than assumed. Most agreements set a target horizon for a listing or strategic sale and give the investor rights to initiate a sale process if that horizon passes. Where investor exit rights include put options or assured returns, confirm that the mechanism is enforceable under the applicable company law and exchange control rules before relying on it. Finally, agree in advance how deadlocks and disputes will be resolved — escalation to founders and investors, then mediation, then arbitration in a named seat — so that a disagreement does not stall the business.

Run the negotiation as a process, not a series of concessions

The most effective approach is to decide internally, before negotiations begin, which terms are genuinely non-negotiable, which are worth trading, and which are cosmetic. Negotiate the package rather than individual clauses, so that a concession on economics can be exchanged for a concession on control. Involve legal and financial advisers early, keep one agreed version of the cap table, and make sure the founders speak with one voice. Investors read internal disagreement as a governance risk.

Above all, remember that the shareholders’ agreement is not a document you sign and file away. It is the operating manual for the relationship for the next five to seven years, and it will be read most closely on the day something goes wrong.

How SRC Chartered Accountants can help

At SRC Chartered Accountants, we work alongside founders and investors through every stage of a private capital raise. Our team supports clients with financial and tax due diligence, valuation and capital structure advisory, review of term sheets and shareholders’ agreement provisions from a commercial and tax perspective, cap table modelling and dilution analysis, regulatory and compliance review of the proposed structure, and post-investment reporting and governance support.

Our objective is straightforward: to make sure our clients understand exactly what they are agreeing to, and to help them negotiate terms that are commercially sound, compliant, and sustainable well beyond the closing date. To discuss an upcoming investment round, please get in touch with our team.

Disclaimer: This article is intended for general information only and does not constitute legal, tax, or financial advice. The terms and structures discussed may vary depending on applicable law and the specific facts of each transaction. Professional advice should be obtained before acting on any of the matters described.