Legal & Compliance
Last updated
Quick Answer
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.
A negative covenant is a contractual promise NOT to do something without obtaining consent from specified parties (typically preferred shareholders or the board).
Understanding Negative Covenant is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Negative Covenant falls under the legal category in venture capital. This area covers concepts related to the legal frameworks and compliance requirements in venture capital.
Newsletter
Join thousands of founders and investors. Every Tuesday.
The VC Beast Brief
Master VC terminology
Get smarter about venture capital every week. Our newsletter breaks down the terms, concepts, and strategies that matter.
VentureKit
Ready to launch your fund?