How Founders Lose Control (And Don’t Know It Yet)

The Hidden Cost of Saying Yes

Medium-sized businesses are the backbone of the Canadian economy. They employ more than half of Canada’s private-sector workforce and contribute close to 40% of the country’s GDP[1]. Yet many are also in that precarious stage of development: to continue to hit targets and unlock their next phase of growth, they need access to quick and flexible capital. One of the easiest ways to get that is by issuing shares or other securities in a finance round.

Yet that can bring its own risks. Imagine closing that round and attracting investors. Maybe it’s a $100K seed cheque. Maybe it’s $2 million from a seasoned group. Either way, it feels like progress, the vision finally moving from plan to scale. And maybe it is.

But it’s also full of risks. Of course, there are regulatory compliance risks (I’ve written separately about the securities framework in British Columbia and the exemptions available to fund a business) yet there are also structural and operational risks. Because the moment a founder says yes to capital without understanding the terms, they may be saying no to something far more important: future control.

The Quiet Cost of Capital

Private investors are generally not villains. They may be individuals with some savings to invest in an exciting enterprise, or they may be seasoned investors with established ideas about how businesses should operate. In any case, they are there to protect their investment. Often this comes by way of structural demands: a board seat or veto rights, for example. They may also want to exempt themselves from protective terms in the company’s shareholders agreement. Some of these demands may seem small or reasonable, largely because the circumstances that would reveal them as problematic simply haven’t shown up yet.

I’ve seen founders agree to terms that felt reasonable in the room, only to find themselves unable to advance the company a year later when strategic decisions get blocked or business opportunities are lost due to internal conflict or incompatible risk tolerance attitudes.

The Slippery Nature of Control

The most dangerous part? Control isn’t always lost in obvious ways. It often slips away through small concessions in language, structure, and timing. In fact, you may not even notice that you’ve lost control until a triggering transaction occurs.

These are important decisions that must be made in structuring a finance round. Once they are made, they are enforceable and you’ll be stuck with the ramifications.

Case Study: When Structure Backfires

The BC Court of Appeal’s decision in Blackmore Management Inc. v. Carmanah Management Corp.[2] offers a sharp reminder of the enforceability of corporate contract terms.

In that case, three companies, each holding one-third of the shares in a business (and, no doubt, each expecting continued operational participation and control), were bound by a unanimous shareholders agreement containing a compulsory buy-sell clause (also known as a shotgun clause). After negotiations to purchase one party’s shares (Blackmore’s) broke down, the other two shareholders jointly triggered the shotgun provision.

In order to evaluate the shotgun offer and decide whether to reverse it, Blackmore requested detailed financial information from the company and also started a legal action to extend the shotgun offer time period until after having received the relevant financial information. The financial information ultimately revealed that the value of the company had increased substantially, and that the shotgun offer price was correspondingly undervalued. So the triggering shareholders tried to back out, arguing that COVID-19 and Blackmore’s legal challenge had changed the landscape enough to void the offer.

This is a classic example of panic in the face of control loss: the triggering shareholders believed the shotgun clause would help them maintain control, but it did the reverse. Their back-flipped position at court was a hail-Mary attempt to take it back.

The Court held, however, that the offer was validly exercised and irrevocable. Once the clause was triggered, it had to run its course with no takebacks.

The Court wrote:

“Sophisticated commercial parties must be taken to understand the market’s risks and uncertainties when entering into contracts. . . Once the respondents invoked the shotgun clause, they were bound by the consequences…”

These were experienced parties, advised by counsel, operating under a contract they had negotiated. Thus the Court declined to “rescue” them from a term they had designed and triggered.

What’s striking is how closely this mirrors real life. Founders and investors often rely on “standard” mechanisms without fully confronting how those mechanisms behave under pressure. After all, a shotgun clause is not intended to be a symbol of fairness, but a severance machine. And courts, for good reason, are reluctant to interfere once these terms are triggered.

A shotgun clause is an obvious example of how control can be unexpectedly wrested away. Other times, it’s a consent right, introduced as “just a formality,” that ends up blocking critical hires or delaying strategic investments. It can look like a board seat promised to someone’s trusted advisor, who turns out to be disruptive, overconfident, or simply misaligned. It can also be as subtle as a carve-out: an investor exempting themselves from basic confidentiality or non-solicitation terms on the basis of their experience or existing obligations elsewhere. You can see where we’re going: there are a lot of places where control can unexpectedly drain away.

None of these things are inherently malicious. In fact, many are presented as ordinary. But each carries structural and operational risk. This risk scales with success. As the company grows, its value increases, not just to the founders but to every shareholder. That’s when the original alignment is tested and when every poorly drafted or ill-considered clause begins to matter.

Where Control Really Lives

Control in this context isn’t just about holding 51% of voting rights.  Real control lies in the buttons and levers of governance: who decides, who blocks, who triggers, and who walks.

I’ve seen founders lose those levers in ways that surprised even them.  Even clauses meant to protect founders can turn if rushed or drafted without care: drag-along provisions, overly rigid exit structures, and seemingly minor consent thresholds can all backfire if not handled with foresight.

Designing for Resilience

So what protects founders?

Control can’t be preserved through optimism or improvisation. It has to be built intentionally.

That begins with the shareholders agreement. A carefully drafted agreement should do more than document ownership. It should establish a framework that protects both the business and the vision that drives it. That means clarity on decision-making thresholds, on founder vesting and buyback terms, transfer restrictions, and on dispute resolution. These are not just formalities. They are guardrails.

Articles of incorporation matter too. Most companies default to standard forms that are, at best, agnostic to founder interests. Revising the Articles to reflect the specific strategic and operational goals of the company, especially in the context of future fundraising or planned exits, is extremely valuable. You can’t rely on default settings to protect a non-default vision.

Then there’s share class structuring. Many early-stage companies issue one class of common shares to everyone, regardless of role or contribution. That’s fast, and it feels fair. . . until it doesn’t. Differentiating classes of shares, with specific rights and limitations, allows founders to retain directional control while still offering meaningful economic participation to others. Done well, it preserves flexibility and prevents imbalance.

In some cases, issuing equity outright isn’t even necessary, especially at early stages. Convertible notes or staged investment models can provide access to capital without triggering immediate dilution or control transfer. For example, a SAFE (Simple Agreement for Future Equity) may be appropriate: these are contracts where an investor gives a company money today, in exchange for the right to receive shares later, usually in the next financing round.

These tools buy time, and time buys leverage.

But none of this works unless there’s clarity at the governance level. Legal documents don’t replace true alignment but only codify it. The most effective structures I’ve seen are those that followed honest, detailed conversations and are engineered to fit: What are we building? What are we willing to give up? What happens if we disagree and how does all of this impact the company’s goals and your personal goals?

The Deal You’ll Still Respect Tomorrow

This isn’t a warning against outside investment. Nor is it a call to hoard control out of fear. Good investors bring value, capital, connections, and credibility. Growth requires compromise and risk. But unintentional structural imbalance kills more companies and relationships than market shifts do. And it always starts small.

So if the money’s on the table, take a breath. Ask what happens if things change and what tools you’ll have if they do. Does the deal you’re signing today still makes sense if you’re the one in the minority tomorrow?

And then ask someone who’s seen how these things play out. Because saying yes is easy. Keeping the right to say no: that takes structure.

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[1] Innovation, Science and Economic Development Canada – Key Small Business Statistics 2024 [https://ised-isde.canada.ca/site/sme-research-statistics/en/key-small-business-statistics/key-small-business-statistics-2024]

[2] 2022 BCCA 117