Protective provisions are governance tools that protect specific shareholders and they can work for both investors and founders, depending on how you structure your stock and agreements.
For investors with preferred stock, these provisions typically include things like liquidation preferences (they get paid first if the company is sold or shut down) and tag-along rights (they can sell their shares alongside founders during an exit). Basically, these protect investors from worst-case scenarios.
Founders can use protective provisions too, usually through high-voting stock like Class A shares. This lets them keep control over key decisions even after they’ve given up majority ownership. For example, a founder might be able to block the board from firing the CEO, maintaining control despite owning less than 50% of the equity.
SmartUp teaches protective provisions from both angles. On one hand, they’re often aggressive terms that VCs push for, especially during down rounds when startups have little negotiating power. On the other hand, they’re also a strategic tool founders can use to maintain leverage and independence. It really comes down to who’s using them and why.
