Consider Voting Rights and Control When Making Venture Capital Deals

In every venture capital deal, control is a critical component. It can be used to block undesired outcomes or dictate desired outcomes. Typically, negative controls give the VCs the right to unilaterally block various corporate actions.
A majority of the shareholders and the board control the result of decisions that need voting. Although Venture capital funds own minority positions, they rely on protective provisions to block action they do support. Protective provisions are a standard part of the basic agreement the entrepreneur enters into with the VCs:
Common categories covered by protective provisions are winding up and dissolution of the corporation; a disposition of the corporation’s assets or a merger or sale of the corporation; issuing or creating senior or pari passu securities; amendments to the corporation’s charter; borrowing money; changing the number of directors, and redeeming securities. The protective provisions give the venture capitalist a veto right to protect they investment by not allowing stockholders or the board to undertake actions that would diminish investors’ equity value.
Entrepreneurs should always remember the agreement that binds them and ventures investor when it comes to control.


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