The percentage sold is visible. The influence transferred is dispersed across board rights, reserved matters, information, future funding and exit provisions. A serious minority-capital decision prices both.

A founder is offered growth capital for 20% of the company. The valuation is attractive, the investor is credible and the existing shareholders retain a clear majority. On the cap table, control appears unchanged.

Then the rest of the term sheet is read.

The investor may appoint a director, receive enhanced information, approve certain decisions, preserve its position in future rounds and influence the timing or mechanics of an exit. None of those rights is inherently unreasonable. Many are designed to protect capital against decisions that could fundamentally alter the investment. Together, however, they determine how the company will actually make decisions when interests diverge.

That is the point at which dilution stops being a percentage and becomes a governance design.

The cap table is only the first ledger

The headline calculation is simple: pre-money valuation, new capital and post-money ownership. It tells shareholders how much of the company they will own after completion. It does not tell them how authority, information, downside protection or exit proceeds will be allocated.

The British Business Bank separates the core term-sheet questions into valuation, equity stake, board structure and governance rights, liquidation preference and exit terms, and anti-dilution provisions. That separation matters. Two investors can acquire the same percentage at the same valuation and leave the company with very different decision systems.

A useful analysis therefore keeps four ledgers visible:

Economics: what capital enters the company, what—if anything—is paid to existing shareholders, which class of security is issued and how value is distributed in different outcomes.

Governance: who sits on the board, which decisions require additional consent, what information is delivered and how deadlock or delay is managed.

Future funding: who can participate in later rounds, what happens if a shareholder does not, how new securities may be issued and where dilution falls.

Exit: who can initiate, block or join a transfer, how different classes participate in proceeds and what happens if the preferred exit timetable is not shared.

Valuation belongs in the first ledger. The investment cannot be understood without the other three.

Reserved matters should protect the investment, not run the company by proxy

Investor consents—often called reserved matters—identify decisions that require approval beyond the ordinary board or shareholder majority. The UK Government’s published term-sheet guardrails describe examples such as issuing shares, changing share rights, significant borrowing, asset sales and amendments to constitutional documents.

The underlying logic is understandable. A minority investor may need protection against a majority that could dilute its position, change the bargain or move value outside the company. The drafting question is where protection ends and operational control begins.

A list can become intrusive through breadth, low thresholds or both. Consent over a transformational acquisition is different from consent over routine capital expenditure. Protection against a material change in business is different from a veto over the annual plan. A threshold that looks substantial at signing may become operationally ordinary as the company grows.

Boards should test each reserved matter with three questions:

1. What specific investment risk is this right intended to protect?

2. Is the threshold calibrated to the company’s plan, scale and expected growth?

3. What happens if consent is delayed, refused or unavailable when a decision is time-sensitive?

The last question is often neglected. Governance is not tested when everyone agrees. It is tested when performance is below plan, more capital is required or the company must act quickly.

A board seat is not just a chair

Board composition determines who receives information, frames debate and participates before a decision reaches a formal vote. An investor director may add sector knowledge, financing experience and discipline. The same appointment also changes the information environment and the dynamics among founders, independent directors and shareholder representatives.

The analysis should go beyond the number of seats. Who appoints and removes each director? Is there an independent chair? Does anyone hold a casting vote? Which matters sit with the board, shareholders or committees? What quorum is required, and can absence prevent a decision? How are conflicts handled when the investor has interests elsewhere in the sector?

Observer rights deserve equal care. An observer may not vote, but access to meetings and materials can still be commercially significant. Information rights can also extend beyond board packs to budgets, management accounts, forecasts, compliance reporting and inspection rights.

More information can improve oversight. It also creates a recurring production burden and may expose competitively sensitive material. The company should know what must be delivered, how often, in what form, subject to which confidentiality and conflict safeguards, and at whose cost.

Future funding can rewrite today’s bargain

The first round rarely settles the capital structure permanently. A company may require follow-on capital, acquisition funding, employee equity or a bridge when performance is weaker than expected.

This is why pre-emption or pro-rata participation rights matter: they may allow an investor to maintain its percentage by joining a future issue. Anti-dilution provisions address a different risk and can adjust economics if later securities are issued on specified less favourable terms. Depending on the agreed mechanics, an option pool may be reflected in the pre-money cap table—diluting existing holders—or created after the investment and shared across the post-money ownership. The precise mechanisms vary materially and require transaction-specific legal and financial analysis.

The board should model at least three later-round cases:

a successful round at a higher valuation;
a delayed round requiring interim funding;
a down round in which not every shareholder can or will participate.

For each case, show ownership, voting power, board composition, consent thresholds and the economic waterfall after the new money. A provision that seems remote in the signing presentation may become the central term when capital is scarce.

Pay particular attention to conditional rights. Does a board seat continue below an ownership threshold? Do consent or information rights fall away? Can a shareholder that does not fund lose protections? Can a new lead investor obtain rights that overlap with or exceed the first investor’s package? The company is not only accepting today’s investor. It is setting the architecture into which the next investor must fit.

Primary capital and shareholder liquidity are different decisions

An equity transaction may combine a subscription for new shares with the purchase of existing shares. The headline round size can therefore exceed the capital actually entering the business.

That distinction affects both the investment case and internal alignment. Primary capital funds the company. Secondary consideration provides liquidity to selling shareholders. Secondary liquidity may be entirely legitimate, but it should be explicit: who sells, how much, why now and how does it affect management’s continuing exposure?

A board evaluating runway, expansion or acquisition capacity should base its plan on net usable proceeds to the company, not on the total transaction value. Existing shareholders should separately understand how the mix affects dilution, incentives and the investor’s expectations for the next exit.

If a large valuation is achieved partly by accepting a restrictive governance package, the economic benefit and the decision cost sit in different places. The company receives capital; the whole shareholder base lives with the governance.

Exit rights can change the value of the same percentage

Minority investments eventually confront a liquidity question. Transfer restrictions, rights of first refusal, tag-along rights, drag-along rights and other agreed mechanisms allocate who may sell, who may join and under what conditions a wider sale can proceed. Preference terms can also affect how proceeds are distributed across security classes.

The terms should be read as a connected system. A tag right may protect a minority holder in a sale by the majority. A drag mechanism may prevent a small holding from blocking an agreed company sale, but its thresholds and conditions matter. A transfer restriction may protect the shareholder group while making liquidity harder. An exit provision that appears balanced in a successful outcome may operate differently when proceeds are close to, or below, invested capital.

Do not model only the optimistic strategic sale. Test at least four outcomes: no exit within the expected period, a partial secondary transaction, a sale above the entry valuation and a sale below it. Then calculate both proceeds and decision rights in each case.

The question is not whether one clause is “founder-friendly” or “investor-friendly”. It is whether the complete mechanism remains intelligible and workable across plausible outcomes.

Price governance through scenarios, not adjectives

Terms such as standard, customary and protective can end a discussion before the actual effect has been examined. A better board process converts each material right into a scenario.

Suppose revenue is 25% below plan and the company needs new capital within six months. Can the board approve the budget? Can it raise debt or equity? Which investor consents apply? What if the existing investor declines to participate? What happens to voting rights, board seats and preferences after the new round?

Suppose a buyer offers to acquire the company, but founders, management and the minority investor have different views on timing. Who can start the process? Who can block it? Can all shareholders be required to sell? How are proceeds allocated? Are management incentives aligned with the shareholder waterfall?

Suppose the company wants to enter a new country, acquire a smaller competitor or change its business model. Is the decision within the agreed plan, a reserved matter or a material change requiring consent? How quickly can a valid decision be taken?

These scenarios make the cost of governance visible. They also expose provisions that are ambiguous, duplicated or inconsistent across the term sheet, articles and shareholders’ agreement.

A minority-capital board paper should answer eight questions

Before approving the investment, the board should be able to state clearly:

1. How much primary capital will the company actually receive and what milestone is it intended to fund?

2. What percentage and security class will each shareholder hold at completion and under the principal future-funding scenarios?

3. Which rights protect against fundamental change, and which could affect ordinary operating decisions?

4. How will board, quorum, observer and information arrangements work in practice?

5. What happens when more capital is needed and one or more shareholders do not participate?

6. How do transfer, tag, drag, preference and other exit provisions operate across different values and timings?

7. Where can disagreement delay a necessary decision, and what mechanism resolves or contains that risk?

8. Which terms require qualified legal, tax, accounting, regulatory or valuation advice before they can be accepted?

The answers should be shown in one integrated model. A cap table without the rights is incomplete; a rights schedule without the economics is equally so.

The right investor is also a decision system

Growth capital can accelerate a company’s plan, strengthen its balance sheet and add valuable external perspective. Minority status can preserve substantial founder or family ownership. Neither fact determines how the relationship will work.

The investment creates a decision system for the years after completion. Its quality depends on the fit between capital, investor, strategy and governance—and on whether the documents behave sensibly when conditions are less favourable than the signing case.

CGPH Banque’s Growth Capital & Fundraising work may include assessment of capital requirements and readiness, financial analysis, capital planning, materials and coordination of an agreed process. Investor identification, introductions, solicitation, regulated placement or distribution activity, investment decisions and legal drafting remain with the responsible parties and appropriately qualified or authorised advisers. Participation, terms, valuation, timing and completion are not assured.

The percentage answers who owns the company. The governance package answers how the company will be able to move.

References and further reading

This article is provided for general information only. It does not constitute investment, transaction, legal, tax, accounting, regulatory or valuation advice, a recommendation, an offer or a solicitation. The effect and enforceability of governance, funding and exit provisions depend on the transaction documents, the company’s circumstances and the applicable law. Decisions should be taken with the relevant qualified or authorised advisers.