This is the second article in our series aimed at helping start-up founders better understand how preference shares work in venture capital transactions. In this instalment, we focus on two critical and often underestimated concepts: voting rights and anti-dilution protection.
When founders review a term sheet for the first time, attention often gravitates toward valuation and liquidation preferences. However, some of the most consequential terms for founder control and long-term economics sit elsewhere, particularly in voting rights and anti-dilution provisions.
Understanding these mechanics early can prevent unpleasant surprises later in the life of the company.
Voting Rights: Who Really Controls the Company?
At a basic level, voting rights determine who gets to make decisions about the company and how much influence each shareholder has over its future.
Ordinary vs Preference Share Voting
Founders typically hold ordinary shares, while venture capital investors receive preference shares. Preference shares may carry voting rights that are:
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Equal to ordinary shares
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Weighted (multiple votes per share)
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Conditional (only exercisable in certain circumstances)
In many venture capital deals, preference shares vote together with ordinary shares on an as-converted basis, meaning the preference shares are treated as if they had already been converted into ordinary shares for voting purposes.
This can materially affect control, especially after multiple funding rounds.
Reserved Matters: Investor Consent Rights
Beyond general shareholder voting, preference shareholders usually negotiate protective provisions (often referred to as “reserved matters”).
These provisions require investor consent before the company can take certain actions, such as:
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Issuing new shares
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Changing the company’s capital structure
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Amending the MOI or shareholders’ agreement
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Incurring significant debt
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Selling material assets or the business
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Appointing or removing directors
Even if founders hold a majority of the ordinary shares, these consent rights can effectively give investors veto power over key strategic decisions.
For founders, it is crucial to understand:
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Which actions require investor approval
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Whether consent is required from a majority or all preference shareholders
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How these rights evolve in later funding rounds
Board Representation and Control
Voting rights are often closely linked to board composition.
Preference shareholders may be entitled to:
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Appoint one or more directors
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Appoint observers
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Approve certain board decisions
While investor input can add significant value, an imbalance at board level can dilute founder influence and shift strategic control earlier than expected.
A well-structured board balances founder leadership with investor oversight, without paralysing decision-making.
Anti-Dilution Protection: Protecting Downside Risk
Anti-dilution provisions protect investors if the company later raises capital at a lower valuation than a previous round (commonly referred to as a “down round”).
In simple terms, anti-dilution adjusts the conversion price of the preference shares, giving investors more shares to compensate for the reduced valuation, which results in greater dilution for founders.
Common Types of Anti-Dilution
1. Full Ratchet Anti-Dilution
This is the most investor-friendly (and founder-unfriendly) mechanism.
If the company issues new shares at a lower price than the investor originally paid, the investor’s conversion price is reduced to match the new, lower price, regardless of the size of the new funding round.
The result can be severe dilution for founders and early shareholders.
2. Weighted Average Anti-Dilution
This approach is more balanced and more commonly accepted in market-standard deals.
Instead of fully resetting the conversion price, a formula is applied that takes into account:
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The lower price of the new round
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The number of new shares issued
This softens the dilution impact on founders while still offering investors downside protection.
Weighted average anti-dilution is generally viewed as more founder-friendly and commercially reasonable.
Why Anti-Dilution Matters More Than You Think
Anti-dilution provisions only apply in down rounds, but founders often underestimate how frequently down rounds occur, especially in volatile markets.
Agreeing to aggressive anti-dilution early on can:
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Make future fundraising harder
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Discourage new investors
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Shift disproportionate value to earlier investors
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Leave founders significantly diluted, even if the company ultimately succeeds
Founders should always consider anti-dilution provisions in the context of the company’s long-term funding strategy.
Key Takeaways for Founders
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Voting rights are about control, not just economics
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Investor consent rights can limit founder autonomy even with majority ownership
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Board composition is as important as shareholding percentages
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Anti-dilution provisions can materially affect founder outcomes in future rounds
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“Standard” terms are often investor-standard, not founder-standard
Final Thoughts
Voting rights and anti-dilution provisions are often buried deep in term sheets, yet they play a decisive role in shaping who controls the company and how value is shared over time.
A strong understanding of these terms allows founders to negotiate from a position of clarity rather than pressure and to structure deals that align with long-term growth rather than short-term capital.
If you are reviewing a term sheet or planning a seed or Series A raise, our start-up and venture capital team can help you understand and negotiate these provisions effectively.
Contact O’Reilly Law to speak to a start-up lawyer who understands both the legal mechanics and the commercial realities of venture funding.