Drag-along Rights & Protective Provisions
The terms sheet sets out Drag along rights and Protective Provisions Drag along rights give the investor the right to force the shareholders (founders and others) to sell the startup. Drag along rights are common in VC deals. The primary reason for a drag along rights clause is that the lead investors want out and require others to join. Protective provisions state that if the founders want to take any action that might affect preferred shareholders\u2019 investments, the founders have to inform the preferred shareholders and get their collective approval first. Here\u2019s a list of common protective provisions: \u2022 Merge, sell, or liquidate the company, or any transaction that results in a change of control of the company. \u2022 Change the capitalization structure of the company \u2022 Issue stock senior to or equal to the stock held by the preferred share investor( s). \u2022 Change the certificate of incorporation or bylaws. \u2022 Change the composition or size of the board of directors. \u2022 Pay or declare dividends. \u2022 Take on a debt obligation such as a loan. Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding. Let\u2019s go startup something today!