Navigating protected provisions

Your price, my terms

Author

Michael Morgenstern
March 19, 2024

Happy Tuesday Brex community,

Protected provisions are essentially the rights reserved by investors, especially minority stakeholders, to protect their investment and ensure significant decisions align with their interests. These provisions become pivotal during pivotal moments, such as a Series B funding round, where large sums are at stake. For instance, in a hypothetical $30M Series B investment, understanding these provisions is not just about securing funds but also about comprehending the long-term implications on company control and decision-making.

Startups need to be aware of three common types of protected provisions: 1) Anti-dilution Rights, ensuring investors maintain a proportionate share of the company despite future equity issuances; 2) Board Seat Rights, granting investors the right to appoint members to the board of directors; and 3) Liquidation Preferences, dictating the payout order in the event of a sale or liquidation. Each of these can drastically shape the future of a startup. The adage "your price, my terms" often rings true in investment negotiations, emphasizing that while a startup might set the valuation, investors have a significant say in the terms of the deal. In an extreme scenario, these provisions can lead to situations where minority investors wield considerable influence over key decisions, sometimes even resulting in founder displacement. We talk about these nuances, chatham house rules, at our events which you can find below.

Growing together, Michael Morgenstern

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