An investor is entering your company and you wish to retain control.

How Control in a Company is Structured

An owner who hears an investor's request for a "minority stake with protection" faces specific questions: how many votes the investor will get, who they will appoint to management, and which decisions they will be able to block. A founder can retain a majority of the capital and still lose decision-making power if the investor is granted a veto on key matters. Conversely, control can be maintained even with a minority of capital if votes and appointments are structured differently.

Therefore, when it comes to decision-making, it is not enough to just look at the percentages of registered capital. What matters is who holds the votes, who elects the managing directors, who must agree to major decisions, and who is entitled to the profit. These four layers can be configured independently of each other, but it is always necessary to distinguish between what must be in the memorandum of association and what can simply be agreed in a shareholders' agreement, which is why it is advisable to separate them during negotiations.

Growth equity differs from an investor entering a startup in that the company is already profitable. Here, the investor is not entering an early-stage concept, but a company with a proven business model, revenues, and a history of growth, meaning the owner has a stronger negotiating position. They do not have to accept terms designed for pre-revenue companies. This is precisely the premise of this article.

Early-stage companies are discussed in the text on how to negotiate an investor's entry into a startup. A pre-revenue startup deals with different issues, which is why the terms and valuation differ, and the founder of an established company does not need to accept the standards that investors apply to early-stage companies. The difference in the position of both parties is crucial during negotiations.

Preparing a company before negotiating with an investor is summarized in the text on how to prepare a startup for an investor's entry. Some of the recommendations are also useful for an established company, such as organizing documents and the ownership structure, which the investor reviews before making an offer. Having documentation in order speeds up negotiations and improves the bargaining position.

In practice, contracts are divided into two layers. The memorandum of association regulates what is binding on the company and its bodies, i.e., voting, bodies, and types of shares with the rights associated with them (Sections 135 and 136 of the Czech Business Corporations Act). The shareholders' agreement binds only its parties, for example, to vote in a certain way, to pre-emptive rights, or to exit mechanisms. Control usually relies on both, which is why they should be drafted together.

The practical process begins with the owner writing down what control means to them. For some, it is about having the final say in strategy; for others, it is about appointing management or having the option to sell the company at a time of their choosing. If the owner does not know these priorities, the investor will define them, and the negotiations will revolve around what the investor considers important, not what the owner needs.

Votes and Majorities in a Limited Liability Company (s.r.o.)

Each shareholder has one vote for every CZK 1 of contribution, unless the memorandum of association provides otherwise, and unless the memorandum provides otherwise, the general meeting is quorate if shareholders holding at least half of all votes are present (Section 169 of the Czech Business Corporations Act). The law therefore assumes that votes correspond to contributions, but allows for this to be modified.

For decisions where the law requires a two-thirds majority, the one-third threshold is key. The consent of at least a two-thirds majority of the votes of all shareholders is required, for example, for decisions to amend the memorandum of association, to allow non-monetary contributions, and to dissolve the company with liquidation (Section 171 of the Czech Business Corporations Act). Anyone holding more than one-third of the votes can block these decisions, even if they do not hold a majority themselves.

An investor who acquires a quarter of the capital and a quarter of the votes will not block two-thirds decisions under Section 171(1) with their votes alone, and the founders will decide on amendments to the memorandum. An investor with thirty-five percent of the votes can block them, meaning the owner loses the ability to change the rules without their consent. Therefore, during negotiations, it pays to calculate not only the share of capital but also where the one-third threshold lies.

If an amendment to the memorandum affects the rights and obligations of only certain shareholders, their consent is required, and if it affects the rights of all, the consent of all is required (Section 171(2)). An investor whose special rights are registered in the memorandum of association is therefore protected against unilateral changes even without a veto and even with a share below one-third. Nevertheless, the memorandum should specify which amendments fall into this category.

An example illustrates the difference. The founders hold seventy-five percent of the votes and the investor holds twenty-five. The founders can push through an amendment to the memorandum of association on their own because they have more than two-thirds. If the investor acquires thirty-five percent, the founders have sixty-five percent and cannot push through the amendment without them. Thus, five percentage points decide who is allowed to change the rules.

Who Manages: Managing Directors and Their Appointment

The election and removal of a managing director falls within the competence of the general meeting (Section 190 of the Czech Business Corporations Act). Unless the memorandum of association provides otherwise, the shareholders decide on the composition of management by a majority of votes, and a minority investor is therefore not guaranteed representation in management. If they require it, they must negotiate it.

The law allows the appointment of a managing director to be tied to a share. The memorandum of association may stipulate that a share is associated with the right to appoint one or more managing directors and to remove a managing director so appointed, provided that the total number of managing directors so appointed must not exceed the number of managing directors elected by the general meeting (Section 194a of the Czech Business Corporations Act). The owner can thus ensure the investor has representation in the executive body without losing the majority elected by the general meeting.

This leads to a practical model. The founders secure the majority of managing directors through votes at the general meeting, and the investor receives the right to appoint one managing director, or a member of the supervisory board if the company establishes one. Multiple managing directors who do not form a collective body decide on business management by majority vote, unless the memorandum of association provides otherwise (Section 195(1)). Under this setup, the investor has information and a voice, but cannot outvote the management on their own; unanimity or a special majority would strengthen their position. Therefore, it is worth negotiating the number of seats and voting rules separately.

The performance of the office of managing director is governed by an executive service agreement, which is approved by the general meeting. Investors often require that the founder-managing directors have their remuneration and duties structured in a way that gives them no incentive to leave the company. It is advisable to address the contractual relationship with the managing directors alongside the investment agreement.

How the Investor Enters: New Contribution or Purchase of a Share

An investor can enter a company in two ways. Either they purchase a portion of a share from existing shareholders, in which case the money goes to the sellers, not the company. Or they assume a contribution obligation upon an increase in the registered capital, in which case the money goes into the company. Growth equity is usually a combination of both, as part of the money is intended for growth and part for the founders.

In the event of an increase in the registered capital by monetary contributions, shareholders have a pre-emptive right, which the memorandum of association may exclude or limit (Section 220). If a shareholder does not exercise their pre-emptive right within the period specified in the memorandum, or otherwise within one month, anyone may assume the contribution obligation with the consent of the general meeting, and the same applies if the memorandum excluded the pre-emptive right or the shareholder waived it (Section 222 of the Czech Business Corporations Act). For the investor's entry, this means that the founders' pre-emptive rights must be settled.

The waiver of a pre-emptive right must be in writing with an officially certified signature or declared at a general meeting, and it is also effective against any subsequent transferee of the share (Section 221). Founders may choose not to exercise it or expressly waive it, or it may already be excluded by the memorandum of association. Since a waiver has long-term effects, the terms of the investment are negotiated first, and only then do the founders waive their pre-emptive rights.

The resolution to increase capital must include, among other things, the amount of the increase, the deadline for assuming and fulfilling the contribution, and the name of the type of share, if the memorandum allows for different types of shares (Section 223). Different types of shares allow the investor to be granted different rights, such as a preferred share in profits, without changing the rights of others, and require an amendment to the memorandum of association.

When an investor enters, it is also worth considering a phased drawdown of the investment. The investor injects part of the capital upon signing and the remainder after meeting specified milestones. Such a split reduces the risk for both parties but requires a precise definition of the conditions, as disputes over whether a milestone has been met are a common cause of misunderstandings after the transaction is closed.

Veto Rights and the Shareholders' Agreement

A minority investor will not gain control through votes, which is why they demand a veto over selected decisions. A standard list includes budget approval, significant investments and debt, asset transfers, changes to the line of business, issuance of additional shares, management remuneration, and disputes above a certain value. Each item limits the owner's freedom, which is why the list is worth negotiating extensively.

The owner should demand that vetoes be specific, limited by value, and time-bound. A veto on any contract paralyzes day-to-day operations. A veto on contracts above a set threshold is acceptable. A veto that expires when the investor's share falls below a certain level protects the owner from permanent restrictions. The specific list of vetoes is usually negotiated in a shareholders' agreement, which is analyzed in the text on the shareholders' agreement beyond the scope of the memorandum of association.

However, a veto agreed only in a shareholders' agreement binds only its parties; with respect to other persons, including the company, the agreement is effective only in cases stipulated by law (Section 1759 of the Czech Civil Code). If a founder votes in violation of the agreement, the investor typically seeks contractual remedies, such as a contractual penalty. If they want to be sure that a decision will not pass corporate-wise without their consent, the veto must also be reflected in the memorandum of association, for example, by a higher majority for selected decisions or a right associated with a special type of share.

The investor's economic rights form the third layer and must be divided into two levels. A preferred share in profits is a real right associated with a share only if the memorandum of association regulates it as a special type of share (Sections 135 and 136 of the Czech Business Corporations Act). On the other hand, the distribution of proceeds upon the sale of the company or anti-dilution protection can also be agreed contractually in the shareholders' agreement. Each of these rights reduces the value of the founder's share, which is why they must be calculated in monetary terms. The founder should know how much they will receive upon the sale of the company at various prices and how the proceeds will be distributed.

The fourth layer consists of exit mechanisms. The investor wants to be sure they can exit the company after a few years and demands the right to sell their share alongside the founders, the right to drag along the founders to a sale, or a buy-out option. The owner, on the other hand, wants the option to buy out the investor. These mechanisms are negotiated contractually, and their form depends on the agreement, not on the law.

When choosing an investor, it also matters what they bring in addition to money. An experienced investor provides contacts, market knowledge, and assistance in subsequent rounds of financing. The owner should request references and find out how the investor behaved in companies where they held a minority stake and whether they respected the agreed division of roles.

Market Standard and Red Flags

For established companies, the investor is usually satisfied with a minority stake, representation in management, and a veto over a limited list of decisions. The owner retains the majority of votes, the right to appoint the majority of managing directors, and operational management. The investor receives information rights, regular reporting, and anti-dilution protection.

A red flag is a request for a veto over "all significant decisions" without definition. Such a veto turns a minority investor into a co-decision maker. A second red flag is a demand for majority votes with minority capital without justification. A third is an automatic right for the investor to remove a founder-managing director. A fourth is an exit mechanism that forces the founder to sell the company at a time determined by the investor.

The structuring of negotiating positions and the timing of negotiations are also influenced by how the investor approaches the company. The document outlining the investment terms, i.e., the term sheet, is usually binding only in part, and for growth equity as well, what is binding must be explicitly marked.

Price and control are interrelated. An investor who receives less control often demands a lower price, and vice versa. The owner should therefore decide in advance what is more important to them: the highest possible valuation or full control. Achieving both simultaneously is usually not possible during negotiations, and attempting to do so leads to protracted negotiations.

Typical Mistakes and Their Cost

The first mistake is focusing on the percentage of capital and overlooking votes and vetoes. The owner makes sure they have a simple majority, only to find out that the investor has the right to block the budget, investments, and debt. The cost is the loss of control over day-to-day management, which the owner did not want to lose.

The second mistake is waiving the pre-emptive right before the terms are agreed upon. The waiver of a pre-emptive right is also effective against subsequent transferees of the share and cannot be expected to be easily revoked. If negotiations on the terms then drag on or fail, the owner has lost protection against dilution without securing the investment.

The third mistake is overlooking the one-third threshold. An investor with a minority share above this threshold can block amendments to the memorandum, meaning the owner cannot change the rules, accept other investors, or modify the types of shares without their consent. The cost is blocked future growth. The solution is to adjust the votes or the upper limit of the investor's share.

The fourth mistake is neglecting the exit. The agreement addresses the entry but not what happens when the investor wants their money back in five years. The Prague-based legal team at ARROWS advokátní kancelář assess votes, appointments, vetoes, economic rights, and the exit together for each transaction, because control arises from their combination, and a weak spot in one layer nullifies protection in the others.

Risks of an Investor Entering an Established Company

Final Summary

Control in a company after an investor's entry arises from a combination of votes, appointment of managing directors, vetoes, and economic rights, not from the percentage of capital. The article showed that for two-thirds decisions, the one-third voting threshold is key, alongside which the investor is also protected by individual consent under Section 171(2), that the appointment of a managing director can be tied to a share, and that vetoes and economic rights must be in the correct document.

For a company owner, this implies a clear procedure: first decide what you want to retain, then set up the votes and appointments, and only then negotiate the price. The later the issue of control is opened, the more the owner has to compromise, because the investor already has an agreed valuation and takes the negotiated terms as a given.

The Prague-based legal team at ARROWS advokátní kancelář guides investors' entries into established companies, prepares memoranda of association and shareholders' agreements, and negotiates vetoes, exits, and economic rights, both on the owner's and the investor's side. Write to us at consultation@arws.cz or explore our service for contracts and negotiations.