Definition
Protective Provisions (Veto Rights)
Protective provisions are veto rights that let investors block certain major company decisions even as minority shareholders.
Through protective provisions in the shareholders' agreement, investors require their consent for key actions — issuing new shares, taking on large debt, changing the business, selling the company, amending the charter, or altering the board. These rights protect minority investors from decisions that could harm their stake.
The list of reserved matters is heavily negotiated in the term sheet, balancing the investor's need for control with the founders' ability to run the business. Protective provisions are a core governance feature of venture and PE deals.
Related terms
- Term SheetA term sheet is the non-binding document that sets out the key terms of a proposed startup investment before definitive agreements are drafted.
- Liquidation PreferenceA liquidation preference gives preferred investors the right to get their money back (or a multiple of it) before common shareholders in an exit or wind-up.
- Nominee DirectorA nominee director is appointed to a board to represent the interests of a specific stakeholder, such as an investor, lender or the government.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.