What are Protective Provisions?
Protective provisions give preferred shareholders (typically investors) veto power over certain major decisions. Even if the board approves, these actions require separate approval from a majority of preferred shareholders.
Why Protective Provisions Matter
Protective provisions prevent founders from taking actions that could harm investors without investor consent. They are standard in venture deals and provide a check on founder authority for decisions with significant financial implications.
For founders, understanding protective provisions is essential. Actions like raising new funding, selling the company, or changing the charter may require investor approval regardless of board composition.
Common Protective Provisions
Standard provisions include: issuing new shares, changing authorized shares, amending the charter, selling the company, paying dividends, and taking on debt above a threshold.
Formula
Standard Protective Provisions require preferred approval for:
- Issuing shares senior to or equal to preferred
- Amending certificate of incorporation
- Changing authorized shares
- Declaring dividends
- Approving mergers or acquisitions
- Increasing or decreasing board size
Example
Your SaaS company wants to raise a bridge round:
- Board: 3 founders, 2 investors (founders control)
- Protective provisions: Require preferred approval for new shares
Even though founders control the board, issuing new shares for the bridge requires approval from a majority of preferred shareholders. One large investor could block the financing if they disagree with terms.
This is why investor relationships matter beyond just board seats.