Are You Giving Up Too Much? How Female Founders Can Avoid Common Funding Traps

As a female entrepreneur, securing funding for your startup can be both exciting and daunting. Whether you're seeking venture capital (VC) or angel investments, the legal complexities of investor agreements can be overwhelming. Having reviewed and signed a few myself, I know first-hand what I am talking about and will share my experience in this month’s article.

Let me break down the key legal elements of funding and provide you with practical tips for dealing with investor agreements while protecting your interests as a founder.

VC vs. Angel Investors

When seeking outside funding, it’s essential to understand the differences between venture capital (VC) and angel investors.

Venture Capital (VC)

VC firms provide capital to startups with high growth potential, typically in exchange for equity. Venture capital is often structured in multiple rounds (seed, Series A, Series B, etc.), with increasing levels of investment as the company grows. The goal for VCs is to realise significant returns when the company scales or exits through acquisition or an IPO. In my case, we also raised with a VC fund that was clearly more interested in the return on investment (ROI) and applying their own vision for the startup than that of the founders.

In a world where, according to PitchBook , in 2022, only 2.1% of venture capital went to female-founded startups, it is critical for female entrepreneurs to understand and navigate the VC landscape carefully.

Angel Investors

Angel investors are usually individuals who invest in early-stage startups because they have a personal connection, personal interest or an attachment to the project or person. They often provide smaller amounts of capital compared to VCs but are generally more flexible and may require less control over company operations. Yet, they can be very hands-on and more involved than VCs, especially during the first phases of your business. For female entrepreneurs, angel investors can be a great option for starting a business, as such investors usually provide valuable guidance and mentorship.

While both VCs and angel investors bring capital to the table, their involvement and expectations can vary, making it vital to assess which type of funding aligns best with your goals.

In Europe, female entrepreneurs are more likely to seek out angel investors, and women-led companies make up about 18% of angel-backed startups, according to the EBAN - European Business Angel Network (EBAN).

Watch out for these key clauses in Investment Agreements

Having reviewed, negotiated, and signed a few during the last years, investor agreements are filled with legal terms and clauses that can significantly impact your ownership, control, and future earnings. I have put together a few key ones to look out for:

Equity Ownership and Dilution

When you accept investment, you are likely giving up a portion of your equity. Dilution occurs when additional shares are issued in future funding rounds, reducing your ownership percentage. While dilution is normal, excessive dilution can leave founders with little control or financial gain. According to Crunchbase , on average, female startup founders retain less equity compared to their male counterparts, owning about 14% of their companies, versus 21% for men.

Be mindful of how much equity you’re giving up in each round and consider the long-term implications. Especially when you are a new founder and just starting up, you should refrain from giving up the majority of shares.

Board Seats and Decision-Making Power

Investors often request a seat on the board of directors in exchange for their investment. While board seats offer expertise and guidance, they also give investors decision-making power. Be cautious of giving away too much control, especially if it limits your ability to make key decisions independently. Those powers, including veto rights, are usually contained in the investment agreement and shareholder agreement (which is updated with every round of investment).

Anti-Dilution Protection

Anti-dilution clauses protect investors from dilution in subsequent funding rounds, often by adjusting their ownership percentage. While these clauses benefit investors, they can hurt founders by further diluting their shares. This may be a tough one but make sure to negotiate reasonable terms that don’t excessively disadvantage you or your team, and that every shareholder dilutes, even if not equally.

Some piece of advice

In order to protect your decision-making power, focus on limiting the number of board seats offered to investors. Negotiate for independent board members, persons you trust and who share the same vision with you, or maintain a majority of founder-controlled seats. This allows you to retain more control over the company's direction.

Ideally, investors should make agreements as founder-friendly as possible to keep founders engaged and motivated, creating a win-win environment. Investor agreements should not disproportionately favour investors at the expense of founders. For example, by negotiating the cap on anti-dilution protection. It's crucial to advocate for terms that reflect the value you bring to the business, especially in industries where women are underrepresented.

Even seasoned entrepreneurs can make costly legal mistakes when negotiating investor agreements. Here are two key ones:

Failing to Read the Fine Print

Contracts are often filled with dense legal language. It's vital to review every clause carefully, even if the terms seem standard. Many founders unknowingly agree to unfavourable terms because they didn’t fully understand the implications. And on that note, make sure to hire your own independent lawyer to review and negotiate the contract on your side.

Personal Liability Risks

This is a significant one and requires you to know and evaluate the risks properly. Some investor agreements may include clauses that expose you to personal liability, such as personal guarantees for loans or investments. Always ensure that your business, not you personally, is liable for the repayment of funds or performance of contractual obligations.

Last but not least

Fundraising can be a long and tiring marathon. Once you’re finally at the stage where you receive the investment contract, the excitement and desire for quick closure often become the main focus. However, securing funding is a major milestone for any entrepreneur, but understanding the legal complexities of investor agreements is critical to your success.

By carefully reviewing terms, negotiating strategically, and seeking expert legal counsel, female entrepreneurs can protect their businesses while pursuing growth. Approach funding discussions with confidence, knowing that you're equipped to secure the best possible deal for your company—and don’t be afraid to negotiate.

Got any questions in regards to fundraising or your investment agreement? Feel free to reach out to me!

About the author: Alexandra is an award winning serial entrepreneur who has been active in the gaming, tech and e-commerce fields. She is a lawyer specialised in commercial contracts, IP & IT law and holds two LL.M.s from King's College London and University of Paris I: Panthéon-Sorbonne. She has lived in 7 countries & 3 continents to date and speaks 4 languages. She enjoys to connect and network with like-minded individuals and entrepreneurs.