Protective Provisions
Definition
Protective provisions are veto rights written into a company's charter that require preferred shareholders' approval, usually by a majority vote of the preferred class, before the company can take specific major actions.
How it comes up in fundraising
A term sheet's protective provisions list typically covers raising new financing, selling the company, changing the size of the option pool, and amending the charter, giving investors a check on decisions even without a board majority.
Frequently asked questions
How are protective provisions different from board approval rights?
Board approval rights require a board vote, where investor-appointed directors may or may not hold a majority. Protective provisions require a separate vote by the preferred shareholders as a class, regardless of board composition.
Can protective provisions block a company from raising its next round?
Yes, if the new financing requires an amendment to the charter or issuing new preferred stock, which is why founders negotiate the scope of protective provisions carefully before signing.
Round Funded resources
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