Protective Provisions
Veto rights held by preferred shareholders over specific major company actions, like a new financing or a sale.
Protective provisions require the company to get approval from a specified class or majority of preferred shareholders before taking certain major actions — issuing new senior stock, changing the size of the option pool, incurring significant debt, amending the charter, selling the company, or liquidating. They're separate from board voting and give investors control independent of board seats.
These provisions exist because preferred stockholders have economic rights (like a liquidation preference) that could be undermined by company actions taken without their input — for example, issuing a new class of stock senior to theirs. Protective provisions are standard across nearly all US venture deals, though the specific list of actions requiring consent, and which investor class holds veto power, varies by round.
Watch for protective provisions that require single-investor consent rather than a majority of the preferred class — a lone small investor holding an effective veto over financings or a sale is a governance landmine that gets harder to unwind every round.
Can a single investor block a company sale with protective provisions?
It depends on the exact drafting — most protective provisions require a majority of a preferred class to approve or block major actions, but poorly negotiated terms can occasionally give a single investor an effective veto.
Related terms
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