VC & PE Glossary
What Is Veto Rights?
Updated
Definition
Veto rights give specific shareholders or board members the power to block major corporate actions — such as sales, new financing, or charter changes — even if a majority otherwise approves.
Useful for: Founders, Investors
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.
Related terms
- Voting Agreement — A voting agreement is a contract among shareholders — often founders and investors — that binds how they vote their shares on board elections, sales, and other key decisions.
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Common questions
Short answers for founders, LPs, and operators