Startup Governance & Control Series (Part 5)
Loss of Economic Control Without Dilution: How Founder-Friendly Terms Still Shift Power
“I still own 68%.”
Maybe. But if the money moves without you, control is already gone.
In African venture deals, dilution gets all the attention.
So founders obsess over ownership percentages — 60%, 70%, even 80%.
But control doesn’t just live in the cap table.
It moves through capital structure, cash flow priorities, and upside mechanics.
This part of the series breaks down how “founder-friendly” terms quietly transfer control — not by cutting equity, but by reshaping how value is distributed and who gets to decide when, how, and why.
Participating Preference Shares: Double Claim, Hidden Cost
These shares let investors:
Recover their investment first (i.e. before anyone else gets paid),
Then join in the remaining upside — as if they were a common shareholder.
“Investor shall receive a 1x participating liquidation preference, non-cumulative.”
The phrasing looks benign. The economics aren’t.
Example:
Startup exits at $10M.
Investor A put in $2M for 20% ownership, with a 1x participating preference.
They get their $2M back first, then 20% of the remaining $8M = $1.6M.
Total: $3.6M.
The founder — even with 70% equity — walks away with less than 60% of the pot.
What looks like majority ownership ends up as minority economics.
This structure is often pitched as standard downside protection — but it changes exit math entirely. And once embedded in the stack, it’s hard to reverse.