Protective provisions

Protective provisions are corporate actions that need approval of a majority (or supermajority) of the preferred — sometimes as a class vote. They are how "friendly" investors still hold hard power. In a deadlock, preferred can block a financing or a sale until terms improve for them.

The big idea

A lock on the fire exit is the picture: you should not be able to sell the building or reprint the shares without the people who funded the last wing. The analogy breaks when the lock is on the coffee budget. Then you have a hostage situation, not a partnership.

Typical items that belong:

• Alter the rights of the preferred / amend the certificate in adverse ways
• Authorize senior or pari passu preferred
• Pay dividends or redeem stock
• Sell the company / merge / liquidate
• Increase the option pool beyond agreed levels
• Take on unusual debt
• Change business lines in material ways (sometimes)

Hire/fire the CEO or change compensation on this list is more aggressive — push back. That fight belongs on the board, not as a class veto.

Walking through it

Raising Series B above authorized preferred. Needs preferred consent. Expected.

Selling the company for $40M when preferences total $50M. Preferred may want a different structure, an earnout, or no deal. Common may want the sale for career and a partial recovery. Drag-along thresholds and fiduciary duties collide. Get counsel early. See M&A.

"Any debt over $100k." Blocks ordinary venture debt or an equipment facility without a partner call. Set thresholds that match stage — hundreds of thousands to low millions, not coffee money.

Expanding the option pool. Often requires preferred consent. That is leverage in every refresh. See option pools.

Common mistakes

• Agreeing to operating vetoes to "just close." You will live with them every quarter.
• Ignoring the class-vote mechanic. A small preferred holder can still matter if the class votes as one.
• Treating a friendly lead as a substitute for a narrow list. People change. The certificate does not.

Check yourself

Which veto is market, and which is a hostage clause: (a) issuing senior preferred, (b) any spend over $50k?

(a) is market control/economics. (b) is day-to-day ops and should come off.

The board is founder-majority. Can founders still sell the company alone?

Usually no. Sale is almost always on the preferred veto list.

Key takeaways

• Protective provisions are preferred vetoes, not board votes.
• Keep them on sales, senior stock, charter changes and large related-party deals.
• Operating vetoes (small spend, hiring) turn a partner into a gate.

Further learning

NVCA Model Legal DocumentsModel Legal Documents The NVCA Model Legal Documents serve as the industry-embraced model documents to be used in venture capital financings. What's new: Most recently, the NVCA model documents were revised to reflect…National Venture Capital Association - NVCA -

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