Jim Ryan wrote the column “Understanding Protective Provisions” in the Journal of Artificial Intelligence and Robotics. He addresses protective provisions in venture term sheets and the financing documents that follow, including (1) preferred stockholder veto rights and (2) investor-director “consent” or “negative covenant” rights (typically embedded in the investors’ rights or shareholder agreement).
Venture investors are commonly minority owners. Without special protections, they would have limited ability to influence fundamental decisions that could meaningfully change their risk profile, especially decisions where founder and investor incentives may diverge. Protective provisions are intended to address that gap. These provisions most often address risks around changes in the capital structure, exits and liquidity, and governance.
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