Do Venture Capitalists Always Get Veto Rights On A Company Raising More Money?

Q:  Is it customary for an equity investor to have a veto right over future investments that are at parity or senior to that series?  Do you see it often?  Do you ever see it limited by the percentage ownership (e.g. if the series becomes a less than 10% shareholder, the veto right goes away)?

A: (Jason)  It is customary.  In fact, most times the previous investor gets a veto right on all equity financings, senior or junior and in some cases even debt issuances.  This is one of the “standard” terms that Brad and I blogged about in our term sheet series regarding the protective provisions section of financing documents.  As for a limitation, yes, it’s not unusual for the term to go away if X% of the preferred outstanding at the time the provision is adopted remains outstanding.   What is X?  I’ve seen anywhere from 25-75%.  50% seems to be non-controversial. 

Note also that beside the veto right, the prior investors will also have a right of first refusal to participate in whatever financing you are contemplated.  Here’s our prior post on the subject. So while they can say “no” to a financing, they can also say “yes” and either participate or not.

None of this is “as bad as it sounds.”  Remember, the VCs are going to want money to come into the company, if appropriate.  Without it, the company (and their investment) will not be worth much.  When it typically gets to be a problem is when a company raises several different rounds of capital and each series of stock has a separate veto right, instead of an aggregate veto right across all preferred.  There have been situations where a new / contemplated financing round is good for some of the prior investors and bad for others.  In this case, separate veto rights can, indeed, cause a problem.

  • Dave Ryan

    Thanks, Jason. Have you ever seen the veto go away if the series gets diluted below a certain percentage ownership (i.e. all shares remain outstanding, but the percentage of the company owned by the series declines below, say 10%)?

  • Adriano

    ROFR: does it protect more the majority than the minority shareholder i.e is it a majority shareholder clause?

    • It is usually focused on the large / majority investor or a strategic investor.