Voting Rights

What is veto rights?

Veto rights are the protective provisions in a startup's charter that forbid the company from taking listed actions without preferred stockholder approval. They are not a separate security. They work by conditioning corporate acts on a class vote, so a minority holder can block a financing, a sale or a charter change outright.

The default rule, and why nobody uses it

Delaware's baseline is one share, one vote. Section 212(a) of the General Corporation Law provides that unless otherwise provided in the certificate of incorporation, each stockholder is entitled to 1 vote for each share of capital stock held. Section 216 lets the charter or bylaws set quorum and vote requirements, subject to the floor that a quorum can never be less than one third of the shares entitled to vote.

Statute also supplies one veto the charter cannot easily take away. Section 242(b)(2) gives the holders of a class the right to vote as a class on a charter amendment, whether or not the certificate grants them a vote, if the amendment would increase or decrease the authorized shares of that class, change their par value, or alter or change the powers, preferences or special rights of that class so as to affect them adversely.

Venture financings then override the default in three places: the charter, the voting agreement, and the board's own voting rules. The NVCA publishes model forms for the first two, titled Certificate of Incorporation and Voting Agreement, alongside a Stock Purchase Agreement, Investors' Rights Agreement, Right of First Refusal and Co-Sale Agreement, Management Rights Letter, Indemnification Agreement and Model Legal Opinion.

Layer one: protective provisions in the charter

This is where the veto lives. Figma's restated certificate of incorporation, filed with its registration statement, shows the standard construction.

So long as at least 5,625,000 shares of preferred stock remain outstanding, the corporation may not, by amendment, merger, consolidation or otherwise, do any of the following without the approval of holders of a majority of the then outstanding preferred stock, voting together as a single class and not as separate series, and on an as-converted basis:

• consummate a liquidation event;
• alter or change the powers, preferences, privileges or special rights of the preferred stock or any series of it;
• increase or decrease, other than by conversion, the authorized shares of preferred stock or of any series;
• authorize or issue any equity security ranking senior to or on a parity with any series of preferred as to dividends, liquidation or redemption;
• redeem, purchase or otherwise acquire any preferred or common shares, subject to carve-outs for employee repurchase rights;
• change the authorized number of directors;
• pay or declare any dividend other than a common stock dividend payable in common stock.

Two features deserve attention. First, the remedy: any act or transaction entered into without the required consent is null and void ab initio, and of no force or effect. This is not a damages claim, it is a nullity. Second, the threshold is a share count, not a percentage, so the veto switches off if the preferred class shrinks below 5,625,000 shares.

Series-level vetoes stack on top of the class-level one. The same charter requires approval of at least 55 percent of the outstanding Series Seed preferred stock for its own list of actions, so long as any Series Seed shares remain outstanding. A company can therefore need two separate consents for one transaction.

Layer two: the voting agreement

The charter says what needs consent. The voting agreement says who sits on the board and how everyone votes on control transactions.

BigCommerce's fourth amended and restated voting agreement obliges each stockholder to vote all shares it owns or controls, at every meeting or by written consent, in whatever manner is necessary to elect a named slate. The seats are contractually allocated and conditioned on continued ownership: one director designated by the holders of a majority of the Series A and Series B preferred voting together as a single class on an as-converted basis, for as long as those holders and their affiliates own any common stock; one director designated by a named growth fund for as long as it and its affiliates beneficially own at least 4,098,360 shares; one designated by another investor at a 3,853,564 share threshold; one at a 5,196,965 share threshold.

The same agreement carries the drag-along. When the required holders approve a sale of the company, every stockholder agrees to vote in favor, to vote against proposals that would delay it, to sell the same proportion of shares on the same terms, to execute the transaction documents, not to deposit shares in a competing voting trust, and to refrain from exercising appraisal or dissenters' rights. A drag-along is the mirror of a veto: it removes a vote rather than adding one.

Not every share votes. The BigCommerce agreement expressly excludes non-voting common stock and one series of preferred from the shares it governs, defining them as non-voting shares. Preferred stock with no vote at all is a real category.

Layer three: weighted votes

Charters can also weight votes, at both the stockholder and the board level, and this is where control diverges furthest from ownership.

Figma's charter gives each share of Class A common stock one vote and each share of Class B common stock fifteen votes, with the two classes voting together except where the charter or law requires otherwise. It also weights the boardroom, and the operative number changed once. The restated certificate gave the then-serving common director seven votes on each matter presented to the board or any committee. A certificate of amendment dated February 29, 2024, filed in the same exhibit, replaced that provision with nine votes for the then-serving founder common director, on matters presented to the board or to any committee on which that director sits. The charter names the arrangement the Board Voting Structure, and every reference to a majority of directors is read as a majority of the votes of the directors.

A worked example of a minority veto

Assume a hypothetical company with 100,000,000 shares outstanding on an as-converted basis, of which 30,000,000 are preferred stock and 70,000,000 are common. The charter uses the construction above: a majority of the preferred, voting together as a single class on an as-converted basis, must approve a liquidation event. All figures here are hypothetical.

• A majority of the preferred class is more than half of 30,000,000, so 15,000,001 shares carries it.
• One fund holds 16,500,000 preferred shares. Its share of the class is 16,500,000 divided by 30,000,000, which equals 0.55, or 55 percent.
• Its share of the company is 16,500,000 divided by 100,000,000, which equals 0.165, or 16.5 percent.

So a 16.5 percent stockholder alone can block a sale of the company, because the vote that matters is the class vote, not the company-wide one. Re-check both divisions: 16,500,000 / 30,000,000 = 0.55, and 16,500,000 / 100,000,000 = 0.165.

Now apply Figma's nine-vote board rule to a hypothetical five-seat board with one founder common director, two preferred directors and two other directors. Total board votes are 9 plus 1 plus 1 plus 1 plus 1, which equals 13. A majority requires more than 6.5 votes. The founder common director alone holds 9, which is 9 divided by 13, or 69.2 percent of the votes, and 9 is greater than 6.5. One director controls the board while holding one of five seats.

Common mistakes

Reading ownership as control. The example above shows a 16.5 percent holder with a veto and a one-of-five director with a board majority. Neither appears on a cap table.

Assuming the veto is in the term sheet's most-negotiated lines. Founders bargain hard on valuation and option pool, then accept a protective provisions list that includes changing the authorized number of directors, which quietly freezes board expansion.

Missing series-level consents. A deal cleared by a majority of all preferred can still fail because one early series holds its own 55 percent gate.

Treating a breach as a damages problem. Where the charter says an act taken without consent is null and void ab initio, the transaction simply did not happen.

Forgetting the statutory class vote. Even a series with no charter vote can vote as a class under Section 242(b)(2) on an amendment that adversely alters its powers, preferences or special rights.

How it relates to adjacent terms

Protective provisions are the charter half of this term, and in practice the phrase "veto rights" refers to them specifically. Read the list, the consent threshold and the outstanding-share trigger together; any one of the three can neutralize the others.

Drag-along rights run the opposite direction, compelling a vote in favor of a sale. A cap table can contain both, so the answer to who controls an exit is the interaction, not either clause alone.

Dual-class stock is the weighted version at the stockholder level, and Figma's fifteen-to-one ratio plus its nine-vote founder common director show that the same idea can be applied twice, once to shares and once to seats.

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