What is Protective Provisions?
Nexa Consultancy | Startup & Finance Glossary
Protective Provisions are clauses in a startup's charter or financing documents that give preferred shareholders (investors) veto rights over certain major corporate actions, even if they don't have a majority of votes on the board.
Base Term for Startups: These are standard in VC deals and are meant to protect the investors' minority stake. However, founders should carefully review them to ensure they are not overly restrictive and do not impede the company's ability to operate.
Common Provisions: Protective provisions typically cover actions like selling the company, issuing new shares that are senior to the investors' shares, changing the size of the board, or taking on significant debt.
Base Term Example: A term sheet includes a protective provision stating that the company cannot be sold without the approval of a majority of the preferred shareholders, giving the investors a crucial say in any exit scenario.