Whether a group or a certain percentage of investors receives some or all of these safeguards depends on the nature of the transaction and the bargaining power of the shareholders. Startups should carefully consider whether a separate serial vote is appropriate to allow meaningful transactions or events, taking into account the existing and expected investor profile, as opposed to an agreement of all anticipated shares that vote together in a single class. In many cases, a certain class determination may be superfluous for a particular transaction or event, since the applicable law would require the same class vote. Separate series and super-majority votes can create difficulties for a company that tries to quickly obtain subsequent rounds of funds when the share base increases, when the interests of minority investors differ from those of other shareholders. Warning While most guarantees are non-negotiable, many founders do not recognize the dynamics of control generated by these provisions. In the main post-seed price cycles, the company must agree to guarantees. Too often, founders mistakenly believe that the percentage of ownership is the ultimate driver of control dynamics. But guarantees, even if they should not be seen as a backdoor mechanism for investors to exercise secret control, can absolutely force you to compromise on the big decisions made for your business. It is important for you to know what decisions you have to make to consult with your investors after you have agreed to guarantees. In the case of Series B funding or later, the subsequent cycle may apply for a separate protection rule. The company would generally prefer that preferred shares have a single rule of protection as a group rather than any series of preferred shares that have their own rule of protection. A separate protection rule can be useful in a later financing cycle, if the investor also enjoys a priority liquidation preference (unlike pari passu).
However, the company and investors will want to ensure that a number of preferred shares, which represent a small percentage of the business or represent a small amount in investment dollars, do not benefit from a separate protection regime. Debt securities, in the first place, are a significant cash transaction and change the structure of risks and payments at each exit or liquidation. Debt is by nature higher in a liquidation, some forms of debt can be converted into equity and, in some cases, debts must be repaid before an exit or a fundraiser. It is therefore clearly necessary to regulate any type of debt transaction with the appropriate guarantees. Of course, this can be managed again by the board of directors with a vote that includes non-founders, or simply with the veto protection rule. The protection rule is an essential part of any increase in donations. They give investors clear vetoes over essential business transactions. Without them, investors are at the mercy of majority decisions. They generally do not have a majority at the board or shareholder level.
Since many safeguards can be considered standards, their determination could be deferred to binding agreements. Just write “Usual and usual for transactions of this type,”, under protection. Over the past few weeks, I`ve been studying some of the most confusing terminology in VC term sheets. In my last speech, I talked about who would control the board after Serie A funding. Today, we will look at so-called “protections,” which are a related area of control – and something that investors still need.