What are protective provisions and what power do they give investors?

Full Explanation

Standard protective provisions typically require investor approval for: changes to the company's capital structure (new share classes, splits, mergers), sale of substantially all assets, liquidation or winding up, incurrence of debt above a threshold (typically £500K), annual budgets and material changes thereto, hiring/firing of CEO or material salary changes, related-party transactions, and significant strategic pivots. The rationale is straightforward: investors have written large cheques and need contractual protections preventing founders from (e.g.) selling the company to a friend at below-market valuation. In practice, most protective provisions are rarely invoked because founders and investors usually align on major decisions. However, they become critical in founder disputes or distressed scenarios. Series A typically grants protective provisions to Series A holders only. Series B may expand them to Series B holders and grant Series A holders additional protections. Protective provisions can become unwieldy: a company with five investor classes can require approval from multiple parties, creating decision gridlock. For founders, protective provisions are market-standard but negotiable: founders-friendly terms might limit scope (e.g., excluding salary changes below £100K) or allow single-class investor approval rather than class-by-class.

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