Protective Provisions
Investor veto rights over specific major company actions like selling, raising debt, or changing terms.
Definition
Protective provisions are veto rights granted to preferred stockholders over specific company actions. Common provisions require investor approval to sell the company, raise additional capital, take on debt, change the charter, increase the option pool, or issue new share classes. These provisions ensure investors have a say in decisions that could affect their investment, even if they do not control the board.
Why it matters
Protective provisions can block or delay exits, fundraises, or option pool expansions. If preferred shareholders veto an acquisition, employees cannot access liquidity. Understanding these provisions helps you assess how much control investors have.
Example
A company receives a $100M acquisition offer. The founders want to accept, but the Series B investors (who invested at a $150M valuation) use their protective provision to veto the sale because they would lose money.