Veto rights are blocking powers that let designated investors or directors stop specified corporate actions unless they consent.

How it works

Venture term sheets embed vetoes in protective provisions — usually requiring approval of a majority of preferred shares, or specific series, for actions like:

• Selling the company or substantially all assets
• Issuing senior or pari passu securities
• Changing board size or amending charter rights
• Declaring dividends or redeeming stock
• Incurring debt above a threshold

Some agreements grant individual investors vetoes on follow-on participation or budget overruns — more common in growth equity or corporate venture deals.

Veto rights differ from day-to-day board control. A founder-led board can still be blocked from an acquisition if preferred holders with veto rights disagree on price or structure.

Deadlock happens when veto holders and founders diverge — e.g., investor blocks a down round while runway runs out. Negotiation, waivers, or drag-along mechanics may break impasse if documents allow.

Why it matters

• Founders: Know who can stop a sale or financing. Friendly verbal relationships do not override charter language in a crisis.
• Investors: Vetoes protect downside — preventing recapitalizations that wipe preferences or asset sales below investment value.

Common mistake

Assuming common shareholders can approve an exit when preferred protective provisions require separate preferred consent — a frequent surprise in first-time founder exits.

Related ideas

See also voting agreement, protective provisions, and drag along.