Shareholder input: How to deal with new investors without conflict

You've built your business from the ground up. It's not just a job for you - it's your life's work, the manifestation of your vision, effort and countless hours of work. The company is thriving today, but it has hit its limits. Further growth, expansion into new markets or innovative product development requires capital you don't currently have. And so comes the inevitable question: accept an investor.

Author of the article: ARROWS (JUDr. Jakub Dohnal, Ph.D., LL.M., office@arws.cz, +420 245 007 740)

For many founders, this step is fraught with conflicting emotions. On the one hand, it's an exciting opportunity to take the company to the next level, but on the other hand, they feel apprehension. Fear of losing control, of someone who doesn't know the company starting to interfere with decisions that have been solely in their hands until now. Fear that their vision will be lost in the endless compromises and pressure to make a quick profit. Fear that they will be pushed out of their own project that they have spent years building.

This feeling is perfectly legitimate. The entry of an investor is not just a financial transaction. It is the beginning of a new, high-risk business partnership - in effect, an "entrepreneurial marriage". And as in any marriage, the key to success is the right choice of partner and a clearly defined "prenuptial agreement."

This guide is for you - the visionaries and founders who stand at this important crossroads. We'll show you that the arrival of an investor doesn't have to mean the end of your autonomy. On the contrary, with the right preparation and expert legal advice, this move can be the best strategic decision for your future. The goal is not to avoid the investment, but to structure it correctly to protect your vision while opening the way to unprecedented growth. At ARROWS, we understand that we are protecting not only your shares in the company, but more importantly, your life's work. We are your partners to guide you through this complex process safely and confidently.

Two worlds, one goal: Understanding founder and investor motivations

The most common cause of future conflict is a fundamental misunderstanding that the founder and investor, although sitting at the same table, come from completely different worlds. Their motivations, time horizons and definitions of success can differ dramatically. Understanding these differences is the first and most important step in preventing disputes.

Founder Psychology: Why are you doing this?

For founders, a company is often much more than a collection of assets and liabilities. It's his "baby" that he has sculpted from its first steps. Decisions are often driven not only by data, but also by intuition and a deep understanding of the market and company culture that can't be crammed into a spreadsheet. Your goal is often to build something lasting, to leave a legacy, not just to make a quick profit. This emotional and long-term view is your greatest strength, but it can also be a source of friction with a partner who sees the world through the lens of numbers and ROI. 

The investor's mindset: the spectrum of capital

The term "investor" is too general. To choose the right partner, you need to understand who you're dealing with. Each type of investor brings not only money, but also a specific set of expectations and ways of working.

• Angel Investors and FFFs (Friends, Family, Fools): These investors often enter a company at an early stage, motivated by a personal relationship with the founder, a belief in his or her abilities, or a strategic interest in the industry. They often bring valuable mentoring and contacts, so-called "smart money". Their involvement tends to be more personal and less formal. The risk here is that mixing business with personal relationships can be toxic if boundaries are not clearly set from the start.
• Venture Capital (VC) and Private Equity (PE) funds: these are professional managers of other people's money. Their goal is purely financial: inject capital, help the company grow quickly, and sell their stake at a profit within a pre-defined time horizon (typically 3 to 7 years). With their money comes pressure to perform, processes in place, regular reporting and a clear exit strategy. They are skilled negotiators and expect sophisticated contractual documentation.
• Strategic investors: These are usually larger corporations in your or a related industry. Their goal is not primarily financial return, but rather strategic synergy - acquiring new technology, accessing a new market, or expanding their own portfolio. Their investment horizon may be longer, but their decisions will always be driven by their own corporate strategy, which may change over time and may not always be in line with your original plans.

The biggest mistake founders make is assuming that all money is equal. They aren't. The source of capital determines the nature of the partnership, the level of pressure, and the ultimate definition of success. A founder who seeks a slow and steady growth partner but accepts money from a VC fund is dooming himself to failure because the entire VC model is built on rapid expansion and early exit. Conversely, a fast-growing tech startup may be hampered by the conservative approach of a family office. 

That's why the first "due diligence" you need to do as a founder is not the one an investor is going to do on you. It's your own due diligence on potential investors. Research their portfolio, talk to founders of companies they have already invested in, and ask, "Would you do this again?" This step is crucial and unfortunately often underestimated. 

At ARROWS, we know that not every investor is right for your company. Our first step is always to help clients define what kind of partner they are really looking for - not just what kind of capital. By providing strategic advice, we nip future conflicts in the bud.

Before you high five: the preparation and negotiation phase

Investor entry is a process, not a one-time event. Success depends on the careful preparation that precedes the actual signing of contracts. This phase is about building trust, presenting your vision and showing that you are not only a great businessman but also a reliable partner.

Creating your story: Pitch Deck and Business Plan

Investors don't invest in ideas, they invest in well thought out plans and capable teams. Your pitch deck and business plan are not just presentations, they are key tools that tell your company's story. They must be built on data, they must be transparent, and they must clearly articulate the problem you are solving, your unique solution, the size of your market, and the strength of your team. 

Be honest about strengths and weaknesses. An experienced investor will know when you're hiding something. Transparency from the start builds trust, which is essential for a long-term partnership. 

Dancing around valuation: Where art meets science

One of the most sensitive points in a negotiation is determining the value (valuation) of your company. How can you value a company whose greatest value is in its future potential?

• Valuation methods: for established companies, methods such as discounted cash flow (DCF) or comparison to the market using earnings multiples (e.g. EBITDA multiple) are often used. However, for young and growing companies, historical financial data often does not play a major role. Rather, valuation here is a reflection of team strength, uniqueness of technology or intellectual property (IP), market size and traction to date (user growth, engagement rates, first sales).
• How to defend your prize: Prepare compelling arguments. Show your team's experience, demonstrate the size and growth potential of your market, showcase your patents or unique know-how, and back up your plans with data on customer growth and engagement. Valuation is not an exact science, it is the result of a negotiation.
• Investor's perspective: Investors will always discount your optimistic projections by a measure of risk. He will compare your company to other investment opportunities and will try to negotiate the lowest possible entry valuation to maximize his future profit. Be prepared for tough but fair negotiations.

Due Diligence: Open your books, but don't lose your head

Once you and the investor have tentatively agreed on key parameters (usually in the form of a Term Sheet), due diligence, or due diligence, follows. For many founders, this is the most dreaded part of the process.

• What is it? Due diligence is a systematic examination of the legal, financial, tax and operational health of your company. Its goal is to verify the information you've presented to investors and uncover any hidden risks, the "skeletons in the closet."
• How does it work? Typically, you will be asked to upload a large number of documents to a secure virtual data room based on a request list from the investor. Its team of lawyers, tax and audit professionals will review everything from the memorandum of association, key commercial and employment contracts, intellectual property ownership, accounting and ongoing litigation.
• How to prepare? The key is to be prepared. Keep your company in order. Make sure you have valid contracts, properly handled intellectual property and clean books. A disorganized or incomplete data room is a huge warning sign to an investor. It indicates that the company is poorly managed and can lead to a lower valuation, a requirement for additional guarantees on your part, or even the termination of the entire transaction.

While this may seem like a one-sided process where you are under the microscope, in reality, due diligence is your best opportunity to "test" a prospective partner. The way an investor and their team conduct due diligence says a lot about them. Are their questions strategic and to the point, or are they getting unnecessarily bogged down in trivia? Are their advisors behaving professionally and respectfully or arrogantly? Do they understand the nuances of your business, or are they just mechanically ticking off items on a generic list. A founder who closely observes the other party's behavior at this stage can gain key insights. An investor who is disorganized, disrespectful or demonstrates a poor understanding of your business during due diligence is likely to be a very difficult and unhelpful partner post-investment. Use this stage to answer a key question: "Is this the person I want by my side when the going gets tough?" 

The due diligence process can be stressful for founders. At ARROWS, not only do we help our clients prepare all the documentation and "clean up" the company so that they go through the due diligence process smoothly, but we also teach them how to use the process to their advantage - to get to know their future partner better. We're by their side every step of the way, from preparing the data room to negotiating based on DD findings.

Anatomy of a Deal: Legal and Financial Mechanisms of Entry

Once the negotiations and due diligence are complete, it's time to make the actual investment. How an investor puts capital into your company is not just a technical detail. It's a strategic decision with far-reaching legal, tax and ownership implications. In the Czech environment (most often with limited liability companies), there are several basic paths.

Option 1: Increase of share capital (Primary issue)

This is the classic way to raise growth capital.

• The mechanism: the company creates new business shares which are subscribed by the investor. The money they pay for them goes directly into the company's account and becomes its assets.
• Consequence: the company receives funds for expansion. However, for you as the founder, this means a so-called dilution. Your percentage of the company is reduced because the total number of shares has increased. For example, if you owned 100% of the company and an investor acquires a 20% stake through a capital increase, your share will drop to 80%.

Option 2: Sale of existing shareholding (Secondary sale)

This option is used to allow the founder to monetize part of the value of the company.

• Mechanism: You, as the founder, sell part of your existing stake directly to an investor. The money from the sale goes into your personal account, not into the company.
• Consequences: You gain personal liquidity, but the company does not gain any new capital for its development. This move has significant tax implications for you as an individual. Income from the sale of a share is subject to income tax, although it may be exempt if certain conditions are met (e.g. holding the share for more than 5 years), but from 2025 with a limit of CZK 40 million.

Option 3: Premium outside the share capital

This is a flexible instrument, but less frequently used for new investor entry.

• Mechanism: the shareholder provides the company with equity funding without changing the share capital or the number of shares. The process is administratively much simpler than raising share capital.
• Implications: This instrument is typically used by existing shareholders to refinance the company. It is not attractive to a new investor because it does not give them a direct stake in the company unless combined with another form of entry.

Option 4: Convertible loan

A modern and flexible instrument, particularly popular with early-stage startups.

• Mechanism: The investor provides a loan to the company, which is converted (converted) into a business stake under predefined conditions (e.g. at the next investment round). Often the deal includes a valuation discount in the next round or a valuation cap at which the conversion will occur.
• Implications: it allows you to raise funding quickly and postpone the complex valuation debate until later. But it's a ticking time bomb for you as a founder. You need to understand exactly how much stake the investor will get after the conversion. If the next investment round doesn't happen, the company is left with debt to repay.

To help you navigate, we've prepared a table that summarizes the key differences between the different structures.

Criterion	Increase in ZK (Primary Issue)	Share Sale (Secondary)	Convertible loan
Where does the money go?	To the company	To the founder	To the company (as a debt)
Impact on control?	Dilution of founder's share	Reduction of the founder's share	Deferred future dilution
Tax implications for the founder?	No immediate	Taxation of income from sale	No immediate
Administrative complexity?	High (notary, registry)	Medium (contract)	Low (contract)
Signal to the market?	Growth capital	Founder "cashuje"	Delay valuation, quick funding

Choosing the right deal structure has major and long-term implications. It is not just a technical decision, but a strategic choice. At ARROWS, we analyze our client's goals - whether it is maximizing capital for the company or partially monetizing its existing work - and design a customized structure that is most tax and legally efficient. We routinely handle this process and have extensive experience with it.

The heart of the transaction - the Term Sheet and Shareholders' Agreement (SHA)

If preparation and due diligence is the foundation, then the investment documentation is the building itself. The two documents are absolutely key: The Term Sheet, which is the blueprint, and the Shareholders' Agreement (SHA), which is the constitution of your new partnership. This is where the future distribution of power, money and risk is decided.

Term Sheet: The blueprint for your agreement

The Term Sheet is the document that summarizes the basic business and legal terms of the investment. Although it is largely legally non-binding (except for confidentiality and exclusivity provisions), it provides the moral and practical basis for the final contract. In practice, it is very difficult and damaging to reputation to deviate from the terms agreed in the Term Sheet. 

It is crucial for you as a founder to understand several standard clauses that investors enforce for their protection and that can dramatically affect your future:

• Liquidation Preference: simply put, this clause answers the question: "Who gets the money first and how much when the company is sold?"
  • 1x non-participating: the investor gets his investment back first. The remainder is divided among the other shareholders (including the investor if he converts his shares to common). This is the fairest and most common option.
  • 1x participating: the investor gets his investment back AND he shares in the division of the rest of the money. In essence, he "takes twice".
  • Multiple preference (2x, 3x): the investor gets a multiple of their investment first. Imagine an investor puts in 20 million CZK for a 20% stake and the company sells for 100 million CZK. With 1x non-participating preference, the investor gets his 20 million and you get 80 million. With 2x participating preference, the investor will first get 40 million (2x 20) and of the remaining 60 million, another 20% (12 million), for a total of 52 million. You will be left with 48 million. Small change in the text, huge difference in the result.
• Anti-Dilution Protection: this clause protects the investor in case the next investment round takes place at a lower valuation than his ("down round").
  • Full Ratchet: Very aggressive for founders. Recalculates the price of the investor's shares to a new, lower price, massively diluting the founders' shares.
  • Weighted Average: A milder option that takes into account the number of newly issued shares and their price. It is much more profitable for founders and more standard in the market.
• Exit Rights:
  • Tag-Along: Protection for you. If an investor sells their share, you have the right to "tag-along" and sell your share on the same terms.
  • Drag-Along: A powerful tool for the investor. If the investor finds a buyer for the entire company, he can force you to sell your share along with him, even if you don't want to. For the investor, this is key to securing an exit; for you, it's one of the biggest risks of losing control over the fate of the company.
• Vesting and Founder Lock-up: These are the so-called "golden handcuffs". This ensures the investor that you stay in the company and stay motivated. Vesting means that you gradually "re-earn" your own shares over a period of years (typically 4 years with an annual "cliff" where you get nothing if you leave in the first year). Lock-up prohibits you from selling your shares for a period of time.

Shareholders' Agreement (SHA): the constitution of your company

While the Memorandum of Association is a public document that governs the basic outward functioning of the company, the Shareholders' Agreement or SHA is a private, detailed contract that governs the relationship between the shareholders. It is the most important document for preventing future disputes. 

• What does the SHA govern?
  • Decision-making and veto rights: which strategic decisions (e.g. taking out a large loan, selling key assets, changing a business plan) require investor approval.
  • Composition and powers of bodies: who nominates members of the board of directors or supervisory board.
  • Information obligations: What reports you must provide to the investor and how often.
  • Rules for further financing and profit distribution.
  • Dispute and deadlock resolution mechanisms (see next chapter).
• Enforceability: Breach of the SHA does not invalidate the company's decision (as with a shareholders' agreement) but gives rise to a claim for a penalty, which is often very high, to deter breach of the agreement.

Negotiating Term Sheet and SHA is not just a legal exercise. It is a simulation of your future relationship. The way an investor approaches these negotiations will tell you how they will behave in the future. An investor who insists on extremely one-sided and aggressive terms (e.g. 3x participating preference and full ratchet anti-dilution) is giving you a clear signal: "My profit is above all else, and I'm not willing to share the risk". By accepting such terms, you are not only giving up future profits, but you are entering into a partnership with someone who has a low tolerance for risk and a high desire for control. That's why negotiation itself is a diagnostic tool. An investor's willingness to find a fair, market-standard compromise is the best indicator that they will be a good long-term partner. 

At ARROWS, we have negotiated dozens of investment agreements. We know what is market standard and what is already over the edge. We not only explain to our clients what each clause means in practice, but we actively negotiate terms on their behalf that protect their stake and their influence in the company. A well-negotiated Term Sheet is the foundation of a healthy investor relationship.

When visions diverge: Conflict Prevention and Resolution

Even with the best of intentions and the most sophisticated contracts, conflict can arise. Visions may diverge, opinions on strategy may differ, or human chemistry may simply stop working. The goal of a good legal setting is not to avoid conflict altogether - that is impossible. The goal is to have a pre-agreed mechanism to resolve them without destroying the value of the firm. 

Prevention is the best cure

The best dispute is one that never starts. Again, the basis of prevention is a precisely written Social Housing Agreement (SHA). Clearly defined roles and responsibilities, an agreed business plan and budget, and transparent reporting minimise the scope for misunderstanding and suspicion. 

Deadlock: When the business gets stuck

The most dangerous situation is the so-called deadlock or stalemate. It typically occurs in companies with two partners with 50% shares, when they cannot agree on a key decision and the company is paralyzed. There are drastic but effective mechanisms for these cases that need to be negotiated in the SHA. 

• "Shotgun" clause: These clauses force one shareholder to buy out the other, thus resolving the stalemate.
  • Russian Roulette: Shareholder A offers to buy out Shareholder B for X price. Shareholder B has a choice: either he sells his share at price X or he must buy out Shareholder A's share at the same price X. This mechanism forces the bidder to set a fair price, as it can easily backfire. Its major disadvantage is that it significantly favours the financially stronger party.
  • Texas Shootout: Both partners present a sealed envelope to a third, independent party with a price at which they are willing to buy the other's share. The envelopes are opened and the higher bidder is obliged to buy out the other partner's share at that price. This is essentially a structured auction, which again leads to one of the partners leaving.

Exit clause: Planning for the inevitable

People leave companies. It is crucial to be clear in advance about what will happen to their shareholding.

• Good Leaver/Bad Leaver: this is an absolutely crucial concept. It defines the conditions under which a shareholder (often the founder who is also an employee) leaves.
  • Good Leaver: If you are leaving for reasons beyond your control (e.g. illness, death, retirement), you have the right to sell your share for the full market price.
  • Bad Leaver: If you are fired for gross misconduct, commit fraud, or leave to join a competitor, you are forced to sell your share at a greatly reduced price - often at face value or the price at which you originally acquired it. This clause protects the company and the other shareholders and strongly motivates key people to be loyal and fair.

The following table will help you better navigate these complex mechanisms.

Mechanism	Principle	Benefits	Risks for founders
Russian Roulette	Offer to buy or buy at the same price.	Quick resolution, incentivizes to offer a fair price.	Extremely favors the financially stronger party. You may be forced to sell even if you don't want to.
Texas Shootout	Secret auction, highest bidder buys.	"Winner" gets control, "loser" gets a good price.	Still favors the side with more capital. Loss of share is inevitable for one of the partners.
Good/Bad Leaver	The price of the share depends on the reason for leaving.	Protects company from key people leaving, punishes unfair behavior, motivates loyalty.	The definition of a "Bad Leaver" must be absolutely precise and unambiguous, or risk protracted and costly litigation.

Disputes between partners are one of the most destructive forces in business. At ARROWS, we specialize not only in resolving disputes that have already arisen, but in preventing them in the first place. We create partnership agreements with robust but fair mechanisms for resolving impasses that protect the value of the firm for all parties. If you do find yourself in a dispute, our team of experienced trial lawyers will guide you through the negotiation or litigation process to achieve the best possible outcome.

Life after investment: Building a successful partnership

The work doesn't end when the contracts are signed and the money is credited to your account; it begins. Closing an investment is a starting line, not a destination. Now your job is to turn the agreement on paper into a productive and mutually beneficial partnership.

Communication, communication, communication

Regular, structured and transparent communication is the foundation of a healthy investor relationship. It's not about being micromanaged, it's about building trust. An investor who is well informed is a calm investor. Prepare a simple format for a regular report (e.g., monthly) that summarizes key metrics, successes, as well as issues and challenges. Bad news shared in a timely manner is a problem to solve. Bad news shared late or withheld is a crisis of confidence that is hard to fix. 

The relationship with the investor needs to be actively managed, not passively experienced. Founders who approach their investors as a resource to be managed - providing them with structured information, asking for specific help, and effectively running board meetings - will retain much more influence and derive more value from the partnership than those who see the investor as either the boss or the adversary. A proactive approach allows you to control the narrative and shift the dynamic from "reporting to a superior" to "working with a partner." 

Make the most of your partner

If you've chosen a "smart money" investor, you have more than just a bank by your side. Make active use of their knowledge, experience and, most importantly, their network of contacts. Do you need to reach a potential big client? Do you want advice on a foreign market entry strategy? Ask your investor. A good investor will be happy to help you, because your success is his success. 

Board of Directors development

With the arrival of an investor, the governance of a company often becomes more formal, typically by establishing a more formal board of directors (or a general meeting with clear rules).

• Board composition: in the early stages, the board is usually led by the founders. After the investment, an investor representative (investor director) is added. In later stages, it is healthy to bring in independent directors - experienced industry experts who bring an objective perspective and balance the interests of founders and investors. The goal is to have a balanced board that provides strategic guidance and control but does not hold the company back.
• Your role as a founder: while you may lose a majority stake when an investor joins, that doesn't mean you lose influence. Your voice will still carry a lot of weight if you are well prepared for board meetings, argue the data, and maintain your position as the visionary who best understands the product and the market.
• Investor Representative Duties: It is crucial to remember that even a director nominated by an investor has a fiduciary duty under the law to act in the best interests of the company as a whole, not just the investor who appointed him or her to the position. This is an important legal safeguard that can protect you.

Our work at ARROWS does not end with the signing of a contract. As part of our corporate governance services, we help clients set up effective systems for communicating with investors, prepare them for general meetings and advise them on how to run board meetings effectively. In doing so, we help build strong and productive relationships that are key to long-term success. 

With ARROWS by your side – From vision to secure growth

The journey from the initial idea of bringing on an investor to a successful partnership is complex and fraught with pitfalls. As we have seen, it is a process that tests not only your business model, but also your strategic thinking, negotiation skills and emotional resilience.

Bringing in an investor is one of the most important steps in the life of a company. It is not a process you should go through alone. The risks are too high and the opportunities too great to leave anything to chance. Every clause in the Term Sheet, every provision in the Partnership Agreement, every decision about the structure of the transaction will impact your business, your assets and your vision for years to come.

With comprehensive knowledge of corporate law, tax and transactional advice, ARROWS is uniquely equipped to guide you through the entire process. We understand the world of founders and the world of investors and can build a bridge between the two. We're not just your lawyers; we're your strategic partners, protecting what you've built and helping you achieve your most ambitious goals. 

Are you planning to bring in an investor? Don't leave your firm's future to chance. Contact us today for a no-obligation initial consultation. Let's work together to ensure your vision grows safely and without unnecessary conflict.

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