Whether you’ve only recently decided to seek out capital for your business or you’ve already received (or made) your first offer, the term sheet (or “letter of intent”) is an integral part of the process.
In this series we’ll look to shed some light on the legal language contained in that term sheet by taking a “deep dive” into the most often used terms and how choices made in selecting those terms can affect both Company and Investor. Check out an overview here.
Last week, we discussed one of the primary governance rights given by a Company to its Investors: board representation. This week, we talk about the other primary governance right: “protective provisions”.
Under most state laws, a corporation (or an LLC) cannot take certain significant actions without getting the approval (or “consent”) of the holders of the company’s equity. Generally, this right is held by a majority in interest of all such holders.
The term “protective provisions” is a fancy way of saying (in legalese) that in addition to getting majority approval, the Company must also get the approval of a set percentage of the Investor class in order to take certain of these actions. In other words, the Investors are “protected” from the Company’s doing certain things without their having agreed.