How do veto rights on future investors play out in real life (the protective provisions a VC gives to a startup in a term sheet)?
My experience here is that in:
(x) in traditional, U.S.-based start-ups, with traditional investors that do an “up-round” … these exact protection provisions are never used to block a financing.
They can implicitly scare some smaller investors away from making an offer for a next round IF a big firm did the prior round (because they worry the big firm won’t agree to let the smaller firm into the next round and will instead lead it themselves), but that’s more implicit than explicit.
(y) in the case of non-traditional, but material funders (individuals that own a lot — odd behavior, entities that do not usually do a ton of start-ups — see it all differently, sometimes, etc.) I’ve seen these provisions create a lot of drama; and
(z) of course, in down-rounds and recaps these provisions also provide a limited amount of protection, and do ensure a lot of drama in these scenarios.
The dynamic where Some Rich Guy put in millions himself into our Series “A” and has a lot of protective provisions in particular often leads to different expectations than if you’d had a traditional seed or VC investor, or a traditional-ish collection of angel investors.
At a high-level, get the best terms you can. But just assume any new, material investor you bring in is a stakeholder in any material decision. So if you have choices — pick someone that shares your vision, goals, and values here. Whatever the exact legal and corporate docs say — there are lots of theoretical vetos and actual votes to come.