Protective Provisions
Protective provisions are investor veto rights over key company actions—financings, M&A, budgets, option pool changes, and governance decisions. Allocators evaluate protective provisions because they define real control under stress and determine whether investors can prevent value-destructive decisions.
Protective provisions translate ownership into control. Even with minority equity, investors can hold meaningful power through veto rights. In high-growth markets, these rights may rarely be exercised; in stress regimes, they become decisive.
From an allocator perspective, protective provisions signal:
- the GP’s governance posture,
- how downside is managed, and
- whether decisions like rescue financings and exits are made rationally.
How allocators define protective provision quality
They assess:
- Scope: which actions require consent
- Threshold: single investor veto vs majority of preferred
- Practical enforceability: governance discipline and documentation
- Behavioral history: when and how rights were used
- Alignment: preventing harm without paralyzing execution
- Conflict management: multi-investor situations and deadlocks
Allocator framing:
“Can the GP prevent catastrophic decisions in stress without creating governance gridlock?”
Common protective provisions
- issuing new securities / changing seniority
- selling the company / major asset sales
- debt incurrence beyond thresholds
- changing board composition
- major budget approval and deviations
- option pool increases
- changing charter documents
How allocators evaluate VC managers
Conviction increases when managers:
- use protective provisions to preserve optionality, not dominate founders
- have a clear escalation model for conflict resolution
- have references that confirm constructive governance behavior
- are transparent about how rights were used in difficult moments
- understand trade-offs between control and agility
What slows allocator decision-making
- vague claims of “strong governance” without terms
- rights so broad they create deadlocks
- inconsistent governance across portfolio
- lack of evidence that the GP can manage multi-investor conflict
Common misconceptions
- “Veto rights mean you control the company” → control depends on thresholds and coalition dynamics.
- “More control is always better” → over-control can slow execution and harm outcomes.
- “Governance doesn’t affect returns” → it often determines survival and exit timing.
Key allocator questions
- What are your standard protective provisions by stage?
- When have you exercised veto rights and what was the outcome?
- How do you avoid governance deadlocks?
- How do you handle rescue financings and exit offers?
- How do you balance founder autonomy with downside protection?
Key Takeaways
- Protective provisions define control under stress
- Good governance protects value; bad governance creates gridlock
- Strong managers use veto rights as disciplined downside tools