Investor for your start-up: how to raise money without losing control?

Do you want to take your start-up to the next level but need more money? Often this dilemma is linked to the fear of losing control of your own company the moment an investor enters the company.

However, with a smart corporate solution, it is possible to combine the investor's capital with maintaining effective founder control in the company. It is usually the founder who knows his start-up best and knows how to develop it further.

The arrival of the investor and the loss of control

Let's illustrate the problem with an example. In order to invest in a company, a new shareholder - an investor - comes in, either by contributing to the company's share capital or by transferring part of the shareholding from the founder to the investor. The rest of the investment is made in the form of a premium outside the share capital. As a result, the founder's contribution to the company's share capital may amount to CZK 10,000 and the contribution of the newly arrived investor to CZK 20,000.

According to the provisions of Section 169(2) of the Business Corporations Act ("BCA"), each shareholder has one vote for every CZK 1 of his contribution. The investor thus outvotes the founder at the general meeting. The founder thus loses control.

However, it is often the uniqueness of the founder that makes a start-up successful. In the business world, we know a number of creative founders (e.g. Steve Jobs) who broke through thanks to their novel ideas and unique way of fulfilling their vision for the company.

However, to do this, these founders needed control of the company and the trust of investors, as many decisions would not have otherwise passed muster in the eyes of conservative investors.

Solution: different types of shares with different numbers of votes

Section 135 of the CCC allows a limited liability company to issue different types of shares. Thus, the founder's share may be associated with a multiple number of votes compared to the share of a new shareholder - investor.

Thus, for example, the founder's share may have 3 votes for every CZK 1 of his contribution and the investor's share will have only 1 vote for every CZK 1 of his contribution. The founder thus essentially outvotes the investor at the general meeting and retains control of the company.

The founder thus retains the scope for effective management of the company despite the entry of a new shareholder, even though his capital participation is lower. Therefore, the capital-strengthened shareholder can continue to pursue its vision, even in ways that are outside the "normal". The best, however, must be different.

Corporate solutions for your start-up

Different types of shares with different numbers of votes are not the only option for setting up the relationship between founders and investors. The appropriate solution naturally depends on the specific aspects of the start-up's business, the founder's vision and the investor's conditions.

At ARROWS, we provide start-up founders with comprehensive, tailored legal solutions to successfully pursue their visions and become the best in their fields. Therefore, please do not hesitate to contact us if you have any questions.

Adam Weisser contributed to this article.