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Protective Provisions
Investor veto rights over major company actions, even if investors don't control the board.
Formula
Actions typically requiring investor approval:
- Sale/merger of company
- Amendment to charter
- Issuance of senior/pari passu stock
- Increase in authorized shares
- Paying dividends
- Changing board size
- Material debt (often >$250K-$500K)
Definition
What are Protective Provisions?
Protective provisions give investors blocking rights on specific actions regardless of board control. Even with a founder-controlled board, investors can veto certain decisions.
Common Protections
Typical provisions require investor approval for: selling the company, changing the certificate of incorporation, issuing senior securities, taking on debt above thresholds, and changing board size.
Negotiating Provisions
Standard protections are reasonable. Watch for overreach like approval for operational decisions, employee grants, or spending. These create friction and slow the business.
Example
Company wants to acquire a competitor for $2M in stock.
Even with founder-controlled board approving unanimously, protective provisions require Series A investor approval for stock issuance.
Investor says no. Deal blocked.
This is protective provisions in action.
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