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Oct 18, 2026 · by Ashar Ahmed and Sana Abbasi, Infinity Law Group
Can an investor legally take control of my startup through a new funding round?
Investors can gain control through board seats, veto rights, and financing terms, and all this is often legal when it's properly disclosed and approved. What investors cannot do is use this control to favor themselves at the expense of the company and its other shareholders. Directors owe the following fiduciary duties:
When the Company You Have Built Starts Making Decisions Without You
A lot of founders who call our firmdescribe the same issues that come up in their company. You built the company and invested in its growth;and then it happens—a bridge round or a new board seat begin to make decisions for the company without you . A meeting is held, but nobody told you about it; a vote you didn't see coming occurs financing that shrank your stake to a fraction of its original portion, etc.
You're not imagining these changes , and you may have more rights than you think. Investors are allowed to protect their money, but the directors they put on your board have legal duties, and those duties don't disappear because an investor appointed them. This guide is part of our larger look at business litigation in California .
A takeover typically looks like innocent routine paperwork, and each step can seem reasonable on its own.
Because the company needs the financing, founders often sign quickly, which is exactly when their leverage is weakest.
About 29 percent of seed-stage and Series A deals recorded on Carta in 2025 were bridge rounds. Source: Carta, State of Private Markets: 2025 in Review. Carta's data covers companies on its platform.
Bridge rounds aren't a problem in themselves, but they're often where new terms and new board seats first show up.
Once someone takes a board seat, they owe duties to the company and all its shareholders, including founders holding common stock, not just the investor who put them there. California directors must act in good faith, in a way they believe is in the best interests of the corporation and its shareholders, and with reasonable care (Cal. Corp. Code § 309).
When directors have financial interests in a transaction, additional legal safeguards may apply. California law provides protections for interested-director transactions involving appropriate disclosure and approval, or a showing that the transaction was just and reasonable to the corporation. (Cal. Corp. Code § 310.)).
Controlling shareholders have duties too. The California Supreme Court held that shareholders cannot use their control to benefit themselves at the minority shareholder’s expense (Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93). For more on how this plays out, see our guide to shareholder disputes in a California business.
If an investor's director is voting on a deal that benefits that investor, the best time to raise this self-dealing is before the vote, not after your stake has been cut. Our business litigation team can help you understand whether the deal was properly disclosed and approved while your options are still open. Call 925-732-1188 or reach us through our link.
Many startups are incorporated in Delaware even when everyone works in California, and which state's law applies is one of the first things to sort out. Delaware courts have taken these claims seriously. In one case, the court let former common stockholders challenge dilutive financings that an investor-controlled board approved for insiders' benefit (Carsanaro v. Bloodhound Technologies, Inc., 65 A.3d 618 (Del. Ch. 2013)).
In In re Trados Inc. Shareholder Litigation (2013), the Delaware Court of Chancery examined a sale approved by directors with ties to preferred stockholders. Although the court criticized the sale process, it ultimately found the transaction entirely fair because the common stock had no economic value before the merger.
Yes. Both states let shareholders demand key records, and a records demand is often a smart first step because it replaces suspicion with facts.
In California, the right comes from Cal. Corp. Code § 1601. A shareholder makes a written demand, and the purpose must be reasonably related to their interests as a shareholder. Board minutes are among the records covered.
In Delaware, the right comes from Del. Code tit. 8, § 220. The demand must be in writing and made under oath, and the shareholder must state a proper purpose described with reasonable precision. Board minutes are also covered. (Delaware updated its statute in 2025, and informal records like directors' emails are now harder to get, so how the demand is worded matters.)
The main practical difference is that Delaware asks more of the shareholder up front: a sworn demand and a more precisely stated purpose, compared with California’s simpler written demand and broader “reasonably related” standard.
Before you sign the next round, get the full documents rather than a summary, map who will control the board after closing, and ask whether any director's fund is investing. A few hours of review costs far less than trying to unwind a deal later. As Ashar puts it, skipping that step is "penny wise, pound foolish." More on that in our guide to the cost of business litigation in California.
☐ Has an investor gained a board seat or veto rights in the last year or two?
☐ Was a recent round priced far below the last one, or rushed through?
☐ Have you been left out of board decisions or received documents late?
☐ Did insiders get stock, warrants, or terms that others didn't?
☐ Have you been asked to resign, step back, or sign a release?
If you checked two or more, talk to a lawyer before you sign anything else.
Is it legal for an investor to get a board seat in a funding round?
Yes. Board seats and veto rights are common, legal investor terms. The bigger question is how investor-appointed directors use them, since California directors owe duties to the corporation and all its shareholders (Cal. Corp. Code § 309).
Can I challenge a funding round that diluted my shares?
Sometimes. If directors with a personal stake approved a dilutive deal without proper disclosure and approval, or the deal was not fair to the company or shareholders, the shareholders may have claims depending on the facts.
Is there a deadline to bring a claim against an investor or the board?
Yes. The deadline depends on the type of claim and which state's law applies, and the clock can keep running while you try to work things out, so it's worth confirmingthe timing with an attorney so that they review it early.
If an investor is gaining control of your company, or a new round is on the table and the terms don't sit right, waiting usually means the deal closes and your options narrow. Infinity Law Group helps founders and shareholders understand where they stand before they sign. Call 925-732-1188 or reach us through our link for a confidential consultation.
This article is for general information only and does not constitute legal advice or create an attorney-client relationship.
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