One of the most common agonizing mistakes that frustrate founders of early-stage startups is raising funds from numerous individual investors who each hold shares directly in the company. Yes, it is perfectly possible and legal under the Companies Act 2016 to have up to a maximum of 50 shareholders. However, this doesn’t mean that one should.
It may be tempting and convenient during the early stages of fundraising, but it often creates a heavily congested cap table that becomes increasingly difficult, and even becomes an operational issue to manage as the company grows.
- Routine corporate approvals become a bottleneck
When a company has many small, direct shareholders, even the most basic corporate actions become disproportionately burdensome. Actions such as issuing new shares, updating shareholder agreements, onboarding a strategic investor, or conducting an internal restructuring will typically require approvals or signatures from those individual shareholders.
This is especially relevant under the Companies Act 2016, where the issuance of new shares or the disapplication of pre-emption rights requires shareholder approval under sections 75 and 85. A fragmented shareholder base means founders must chase multiple parties just to implement simple decisions, resulting in delays that can derail fundraising timelines or strategic transactions.
- Investor expectations become difficult to manage
A cap table filled with individual investors also creates complexity in managing communication, expectations, and investor relations. Each investor may have different levels of sophistication, different interpretations of the company’s performance, and different expectations regarding dividends, updates, or liquidity.
Retail investors are often unfamiliar with the long-term, illiquid nature of venture investments and may respond negatively to slower growth periods, valuation shifts, down rounds, or strategic pivots. Over time, founders can find themselves spending significant time responding to ad hoc demands, clarifying misunderstandings, and managing emotional reactions—rather than focusing on building the business.
Compounding the issue, any attempt by an individual shareholder to exit typically requires either a negotiated buy-sell arrangement or a formal capital reduction exercise by the company. Both of these exits are difficult to execute in practice — finding a buyer for a minority stake in an unlisted, early stage company, and for the latter, complying with the strict restrictions and requirements on capital reductions under the Companies Act 2016.
- The risk of disputes and legal escalation increases
A large group of unaligned minority shareholders increases the likelihood of disagreements over dilution, preferential rights granted in later rounds, or dissatisfaction with management decisions. These disagreements can escalate into formal disputes, including threats of litigation or minority oppression claims under section 346 of the Companies Act 2016. Even where the legal merits are weak, the time and cost of responding to such disputes can be substantial. The emotional nature of early investment relationships, particularly those involving friends or family, can further heighten this risk and distract founders from critical operational priorities. Pulled up from our real-life horror story vault are instances where founders even faced police reports being lodged by a desperate investor wanting out…
How to Avoid This Pitfall
Founders can avoid long-term complications by adopting structures that consolidate investors into a more manageable framework.
Licensed Equity Crowdfunding Platforms
A practical starting point is to raise funds through licensed equity crowdfunding platforms that operate using a nominee structure, allowing a broad base of retail investors to legally participate while the company deals with a single registered shareholder. ECFs can even cater to more than 50 investors via the nominee structure.
Special Purpose Vehicles
Where direct investors must be accepted, they can be pooled into a special-purpose Sdn Bhd or LLPs with tightly drafted internal control rules that empower a designated representative or proxy to act on behalf of the entire group, preserving the company’s speed and flexibility for future corporate actions. However, these control mechanisms need to be carefully structured under a separate Shareholder Agreement and Constitution to comply with the Companies Act or the Limited Liability Partnerships Act.
Intentionally Structured Exits
An often overlooked strategy is to intentionally structure exits for early investors as part of future fundraising rounds. When new institutional or strategic investors enter, founders can allocate part of the round to secondary sales to buy out early, fragmented shareholders. This gradually “cleans up” the cap table and transitions ownership toward more aligned, long-term investors, reducing the ongoing burden of managing individual exit requests.
Redeemable Preference Shares
Another potential tool, to be used very carefully, is the issuance of redeemable preference shares (RPS). RPS allow the company to redeem and retire certain shareholders from the cap table in a controlled manner. However, this option must be approached with caution. Under the Companies Act 2016, redemption must comply with statutory requirements under section 72, which restricts redemption to profits available for distribution or the proceeds of a fresh issue of shares. Redemption also impacts the company’s balance sheet and may create strain if not properly planned. While RPS can facilitate structured exits, they require careful legal and financial consideration.
Conclusion
A clean and streamlined cap table is a strategic asset, not an administrative preference. A messy cap table can easily turn off future institutional investors, who often view a fragmented shareholder base as a governance risk and a sign of execution delays. By adopting nominee structures, pooled investment vehicles, intentional secondary exits, or carefully structured preference share mechanisms, founders can preserve operational agility, reduce dispute risk, and maintain an investor-friendly cap table that supports future fundraising and exit opportunities.
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This article was written by Shawn Ho (Partner) from Donovan & Ho’s corporate practice.
Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. Feel free to contact us if you have any queries.
