LEGAL
Raising Capital
Protective Provisions: What Investors Can Veto (and Why It Matters)
Protective provisions are rights that let investors block key decisions—like selling the company, raising more money, or changing the charter. They limit founder autonomy and need careful review.
Why it Matters
Protective provisions give investors veto power over major company decisions — even if they don’t control the board.
They’re standard, but if you don’t understand them, you could accidentally give up key strategic control.
Founders Checklist
Review protective provisions in your term sheet or stock purchase agreement
Understand which actions require investor consent
Negotiate thresholds (e.g. majority vs unanimous consent)
Align voting structure with your board and shareholder setup
Maintain good communication with investors to avoid surprises
Founder Fails
Didn’t realize sale of company required investor consent > blocked exit
Issued new shares without approval > triggered legal breach
Gave each investor individual veto power > couldn’t get anything done
When to ask for Help
Before agreeing to protective provisions in a term sheet
If investors request new veto rights in follow-on rounds
To understand how many votes are needed to approve key actions
When aligning provisions across multiple investor classes
Before executing any action that may trigger a veto
Frequently Asked Questions
Q: What are protective provisions?
A: They’re clauses that prevent the company from taking certain actions without approval from preferred shareholders — even if the board or majority owners agree.
Q: What types of actions are covered?
A: Common ones include:
Selling the company
Issuing new preferred shares
Changing the number of authorized shares
Amending the charter or bylaws
Taking on significant debt
Q: Do they always require unanimous approval?
A: Not always. Some provisions require majority of preferred; others may require a specific investor’s consent. The terms vary by deal.
Q: Are protective provisions bad?
A: Not necessarily. They're designed to protect investor interests. But too many, or poorly negotiated ones, can make it hard to pivot, raise more funding, or sell.