Term Sheets: Investor Rights and Protection

Venture investors rarely invest enough to take voting control of a start-up. Rather, they will use rights and preferences negotiated as part of their series investment to protect their positions from potential opportunistic behavior by founders. They do this by using negative covenants to approve corporate transactions or strategic decisions, providing for participation rights in future financings, rights of first refusal and co-sale rights, redemption rights as well as antidilution protections. We will consider how each of these affect incentives in turn.