Protective Provisions

Terms requiring the consent of specified investors before a company takes certain actions, such as raising money, selling the company or changing share rights.

Example

The company cannot issue new senior shares without approval from a majority of Series A holders.

Important

Broad provisions can block a rescue financing or sale in a crisis, giving a small group effective control.

Related terms

  • Board Composition — The allocation of board seats among founders, investors and independent directors.
  • Term Sheet — A short document setting out the main economic and control terms of a proposed investment before full legal agreements are drafted.

Lessons that explain it

  • A board seat, an observer seat and information rights are three very different things — Board directors vote and carry legal duties. Observers attend without voting. Information rights give access to figures without any role in decisions. Knowing which you hold defines what you can do and what you owe. (9 min)
  • A term sheet sets two things: who gets the money and who gets the say — Every clause in a term sheet affects either the economics - how proceeds are divided - or control - who can make or block decisions. Valuation is only one economic term among several. (10 min)
  • Board seats, vetoes, drag-alongs and anti-dilution decide who holds power in a crisis — Control terms rarely matter when a company is thriving. They matter in down rounds, disputed sales and restructurings - exactly when founders and small investors most need to understand them. (12 min)
  • In a crisis, small investors help most by being calm, fast and clear about what they can offer — When a company faces a down round, a restructuring or a shutdown, investors can make things better or worse. Clarity about your own capacity, prompt decisions and restraint from blame are the most useful contributions. (10 min)

All 578 terms in the Investing glossary