editione1.1.4
Updated September 15, 2023You’re reading an excerpt of The Holloway Guide to Raising Venture Capital, a book by Andy Sparks and over 55 other contributors. A current and comprehensive resource for entrepreneurs, with technical detail, practical knowledge, real-world scenarios, and pitfalls to avoid. Purchase the book to support the author and the ad-free Holloway reading experience. You get instant digital access, over 770 links and references, commentary and future updates, and a high-quality PDF download.
Conversion rights have important downstream consequences. They are complicated and can be confusing—we cover this term in Choosing a Financing Structure.
danger Having multiple automatic conversion thresholds can give the investor with a higher threshold leverage to block an IPO.*
caution While most protective provisions are not negotiable, many founders do not realize the control dynamics these provisions create. In most significant priced rounds following the seed, the company will have to agree to protective provisions. Too often, founders inaccurately believe ownership percentage is the ultimate driver of control dynamics. But protective provisions, while they shouldn’t be considered backdoor mechanisms for investors to sneakily exert control, can absolutely compel you to compromise on big decisions for your company. It is critical for you to know what decisions you will have to consult your investors on after agreeing to protective provisions.
important You’re likely to spend a lot of time here with your lawyer. Despite appearing as a single term, the protective provisions section of your term sheet will typically outline up to 12 decisions investors can veto.
Here are some of the situations commonly covered by protective provisions: