Should the Series B have separate protective provisions?
Takeaway: While Series B investors will share most protective provisions with the Series A, they may negotiate for a separate vote on key issues that could uniquely affect their later-stage investment, a common point of negotiation in growth rounds.
Protective provisions are the set of contractual "veto rights" that prevent the company from taking certain major actions without the approval of its preferred stockholders. When you raise a new Series B financing, a key negotiation point is how this new class of investors will participate in these protective rights.
Will the Series B vote together with the Series A as a single class, or will the Series B have its own, separate veto rights? This is a negotiation about control and governance.
The Default Model: Voting Together as a Single Class
The simplest and most founder-friendly structure is for all series of preferred stock (Series A, Series B, etc.) to vote together as a single class on all protective provisions. This means that to approve a major action, the company would need the consent of a majority of all preferred stock, with all series voting together. This aligns the interests of all your investors and creates a simpler, more unified governance structure.
The Argument for a Separate Series B Vote
Your new Series B lead investor will often argue that they need a separate veto right on certain key issues to protect their specific interests. Their rationale is that they are investing a larger amount of capital at a much higher valuation, and therefore have more at risk.
A common request is for the Series B to have a separate class vote on a few specific, critical actions:
A Sale of the Company: The Series B investor may want a separate veto over any sale below a certain valuation threshold to ensure they get a meaningful return on their investment.
A Future "Down Round" Financing: They may demand a separate veto over any future financing that is done at a price per share lower than what they paid. This gives them direct control over a transaction that would be highly dilutive to their position.
Changes to Their Rights: They will always have a separate vote on any action that would adversely affect the specific rights and privileges of the Series B stock itself.
The Negotiation and the Common Compromise
As a founder, your goal is to have as few separate series votes as possible. A complex governance structure where multiple different classes of stock each have their own independent veto power can lead to gridlock and make it very difficult for the board to make decisions.
A common compromise is to agree that most protective provisions will be voted on by all preferred stock together as a single class, but to grant the Series B investors a separate veto right on one or two truly fundamental issues, such as a low-priced sale of the company or a future down round. This provides the new investors with the core protection they need without creating an overly fragmented and unworkable governance structure.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.