What are protective provisions in a VC deal?

Protective provisions (sometimes called "veto rights") are a standard feature of venture deals. They're a list of actions the company cannot take without approval from a majority (or supermajority) of preferred stockholders.

Common protective provisions include: - Issuing new shares or creating a new class of stock - Selling the company or materially all its assets - Merging with another company - Amending the certificate of incorporation or bylaws - Increasing or decreasing the size of the board - Paying or declaring dividends - Taking on debt above a certain threshold - Liquidating or winding down the company

These provisions exist because preferred stockholders (investors) have different interests than common stockholders (founders and employees). Without protective provisions, a founder could theoretically raise a new round on terms that wipe out the value of existing preferred shares, or sell the company at a price that returns capital to common stockholders before paying back preferred liquidation preferences.

Protective provisions are negotiated at each round. Later-stage investors sometimes require their own separate class approval in addition to an aggregate preferred vote, which can create complex approval chains when a company needs to move fast.