Understanding dilution
In an equity raise through the issue of new shares, existing shareholders own a smaller percentage. Valuation sets the price of those shares, and therefore how much of the company you give up for a given amount. But dilution also plays out over time: future rounds, employee share schemes and some investor protection mechanisms can change it. It helps to look at all of these together, not just the current round.
Governance
Bringing in investors usually changes governance:
- The board: its composition, how many seats go to investors, whether there are independent members.
- Reserved matters: some decisions, such as new borrowing, an acquisition or issuing new shares, may require investor approval. The list and thresholds determine how much room you actually have.
Reporting obligations
Investors ask for regular information: accounts, KPIs, budgets. These requests are legitimate, but their frequency and content should remain manageable for the size of your team.
Liquidation preferences
A liquidation preference gives certain investors the right to recover all or part of their investment first if the company is sold or wound up. Depending on how it is drafted, it can significantly change how sale proceeds are split between shareholders if the company is sold below expectations. It is worth understanding precisely before you sign.
Future rounds
Rights agreed today can affect later rounds, depending on how they are drafted: pre-emption rights, protection against a down round, tag-along and drag-along rights. They can make it easier or harder to bring in new investors.
Tranches and funding conditions
Funds may be paid in one go or in several tranches tied to milestones. Tranching can reduce risk for the investor, but it creates uncertainty for the company. The conditions, how they are measured and what happens if a milestone is missed deserve to be spelled out.
The investor itself
Beyond the terms, investor fit matters: strategy, time horizon, ability to support later rounds, and how they work with management. Talking to other founders they have backed is often revealing.
The role of your advisers
The financial adviser helps you compare proposals, prioritise negotiation points and run the discussions. Your lawyer drafts and negotiates the shareholders' agreement and legal documentation and advises you on what the clauses mean. This article is a general explanation, not legal advice.
Is the highest valuation always the best offer?
Not necessarily. A higher valuation with very investor-protective rights can be less favourable overall than a lower valuation with balanced terms.
Should every point be negotiated?
Prioritising works better: identify the clauses that genuinely affect your freedom to manage and the future split of value, and focus the negotiation there.
To find out more, see our Capital raising page.