Legal & Compliance
Negative Covenant
A contractual restriction that prohibits a company from taking certain actions without investor consent, such as issuing new equity or taking on debt.
A negative covenant is a contractual promise NOT to do something without obtaining consent from specified parties (typically preferred shareholders or the board). In venture capital, negative covenants restrict actions like issuing new equity, incurring debt above certain thresholds, changing the company's business model, acquiring other companies, or paying dividends. They protect investors by preventing founders from making major decisions that could harm shareholder value without investor input.
In Practice
The negative covenants in the Series B required investor consent for: any debt above $500K, equity issuances (except from the approved option pool), acquisitions over $1M, changes to the company's certificate of incorporation, and any related-party transactions.
Why It Matters
Negative covenants define the boundaries of founder autonomy in a VC-backed company. Understanding which actions require consent — and from whom — is essential for founders to operate effectively without inadvertently breaching their agreements.
VC Beast Take
The number and scope of negative covenants has generally expanded with each VC market cycle. The key for founders is ensuring that day-to-day operations aren't hampered by consent requirements. The best approach is broad general authority with specific carve-outs for truly consequential decisions.
Related Concepts
Newsletter
The VC Beast Brief
Join thousands of founders and investors. Every Tuesday.
VentureKit
Ready to launch your fund?