84 Ways Investors Can Hurt Founders (and Each Other)

A pay-to-play clause in the company's charter (its certificate of incorporation) or added in later due to a majority vote ,says that any preferred holder who does not buy its pro rata share of a new round loses some or all of its preferred rights. Often its preferred shares convert into common stock. For example, an investor with $2 million of Series A preferred stock is asked to put in $500,000 more. If it declines, its shares could turn into common and lose their liquidation preference and anti-dilution protection. Cooley reported pay-to-play terms in 10.1% of its deals in Q2 2025 and again in Q3 2025, then 6.3% in Q4 2025, then 8.4% in Q2 2026.¹⁰¹³¹⁴ These clauses show up most in down rounds and rescue rounds. In the Footprint case, the court warned at the pleading stage that "a pay-to-play structure can be actionably coercive and inferably unfair."¹⁵

Sources: Cooley Q2 2025, Q3 2025, Q4 2025, and Q2 2026 Venture Financing Reports; Foley & Lardner memo on Guilbeau v. Footprint (June 2026). Small conflict: Cooley's Q1 2026 report said 7.3% for Q1, and its Q2 2026 report said 7%.¹³¹⁶

In this version, investors who don't participate keep preferred stock, but it is swapped for a new "shadow" series with weaker rights. Investors who do participate keep or upgrade their original series. The board can often create the new series because the charter gives it "blank check" power to set the terms of new preferred stock without a vote. In Footprint, the complaint alleged that the participating funds swapped their Class A stock for a new Class A-1 that converted into about 1.71 times as much common stock as the original Class A.⁴ The court treated this as an allegation, not a proven fact.

Sources: Guilbeau v. Footprint International Holdco, Del. Ch. opinion of May 11, 2026.

Full-ratchet anti-dilution drops the holder's conversion price all the way down to the price of any cheaper later round, no matter how few shares are sold at that price.¹⁸ Cooley gives this example: an investor pays $10,000 for 1,000 shares at $10 each, and a later round is priced at $5. The investor's stock now converts into 2,000 common shares, and the extra 1,000 shares dilute everyone else.¹⁹ Broad-based weighted average only partly adjusts the price, based on how much new money comes in. Cooley's Q3 2024 report said that for the first time in the report's history, 100% of its deals used broad-based weighted average and none used full ratchet.¹⁷

Sources: Cooley Q3 2024 Venture Financing Report; Cooley GO, "What You Need to Know About Down Round Financings."

The weighted average formula in the charter depends on how "shares outstanding" is defined. A "broad-based" version counts options and convertible securities, which makes the adjustment smaller. A "narrow-based" version leaves them out, which makes it bigger. The charter also lists "exempted securities," such as employee option grants, that never trigger an adjustment. Small edits to either list can move a lot of value. Any change to these definitions in a later round is worth a lawyer's review.

Sources: Cooley GO, "What You Need to Know About Down Round Financings" (formula types).

NVCA-style charters usually let the "Requisite Holders," a set majority of preferred stock, waive an anti-dilution adjustment for everyone. If the largest investor is leading the cheaper round, it can vote to waive everyone's adjustment while getting new shares at the low price itself. For example, a lead that holds 60% of the Series A can waive the Series A adjustment and then buy Series B at half the old price. Asking for each series to vote separately, or for any waiver to treat all holders the same, closes this gap.

Sources: General NVCA charter structure (judgment; no survey).

With participating preferred, the investor first takes back its liquidation preference and then also shares in what is left as if it had converted to common. Carta gives this example: an investor puts in $1 million for 50% of the company, and the company sells for $2 million. Non-participating preferred would get $1 million. Participating preferred would get its $1 million plus half of the remaining $1 million, for $1.5 million, leaving common with $0.5 million.²¹ A cap, such as 2x or 3x of the investment, limits the double dip. Carta reported that participating preferred appeared in more than 10% of rounds in Q1 2023, then fell by more than half by Q4 2024.²²

Sources: Osler 2024 Deal Points Report; Carta "Liquidation Preferences" guide; Carta State of Private Markets Q4 2024; Cooley Q2 2026 Venture Financing Report.

A liquidation preference says how much an investor gets back before holders below it are paid in a sale or shutdown.²³ With a 2x preference, a $10 million investment takes the first $20 million of sale proceeds. In a $25 million sale, that leaves only $5 million for everyone else. Cooley reported that 95.8% of its Q2 2026 deals used a 1x preference.¹³ Multiples above 1x show up mainly in distressed or rescue rounds.

Sources: Cooley Q2 2026 Venture Financing Report.

Under stacked seniority, each new series is paid in full before the series below it gets anything. For example, say a company raised $5 million of Series A and $20 million of Series B, and the Series B is senior. In a $22 million sale, Series B takes $20 million, and Series A splits the remaining $2 million. If the two series ranked equally ("pari passu"), they would split proceeds in proportion to their preferences. Osler found that half of the down rounds in its 2024 data issued a senior security, so stacking is most likely when a company is struggling.²⁰

Sources: Osler 2024 and 2025 Deal Points Reports (the 2025 report cites Wilson Sonsini's 21% US figure).

When a company is running out of cash, new money has the most leverage. It may ask for a preference that ranks above every earlier series, sometimes at a multiple such as 2x. Old investors who don't join can end up with little or nothing in a modest sale. A right to join any rescue round on the same terms lets earlier holders protect their position if they can afford to invest.

Sources: Judgment; see Osler 2024 Deal Points Report on senior securities in down rounds.

Cumulative or "accruing" dividends build up every year whether or not the board declares them, and they are usually added to the liquidation preference. For example, an 8% accruing dividend on $10 million adds $800,000 a year, so after five years the preference is $14 million instead of $10 million. In the Trados case, the preferred stock's $57.9 million preference included accumulated dividends.²⁵ The standard alternative, "when, as and if declared" dividends, only pays if the board chooses to.

Sources: Cooley Q2 2026 Venture Financing Report; In re Trados Inc. Shareholder Litigation, 73 A.3d 17 (Del. Ch. 2013).

A redemption right lets an investor force the company to buy back its preferred shares after a set number of years, usually at the original price plus any unpaid dividends.²⁶ Delaware law only lets a company redeem shares out of legally available funds.²⁷²⁸ That limit can set up a conflict between paying the redeeming investor and funding growth. The ODN case (row 48) is the best-known example of that conflict.

Sources: Cooley Q2 2026 Venture Financing Report; Frederick Hsu Living Trust v. ODN Holding Corp. (Del. Ch. 2017 and 2020).

Term sheets often say the pre-money valuation "includes" a new or larger option pool. That means the new shares come only from existing holders, not from the new investor. For example, at a $10 million pre-money with a $2.5 million investment, adding a 15% post-money pool inside the pre-money means founders effectively give up the pool's value. The investor's 20% is untouched. A pool sized to a real 12 to 18 month hiring plan keeps the shuffle small. Post-money SAFEs make this worse for founders, because most pool increases are left out of the SAFE's conversion math (see row 16).⁹

Sources: Venture Hacks (Babak Nivi), "The Option Pool Shuffle"; Y Combinator post-money SAFE definition of "Company Capitalization."

In a bridge round, insiders often get warrants, which are rights to buy more shares later at a fixed price, or a discount on conversion. These terms reward the bridge investors for the risk they take. But if the bridge is offered only to insiders, the sweeteners shift value away from everyone else. For example, 25% warrant coverage on a $2 million bridge gives insiders the right to buy $500,000 of stock at today's price. A same-terms rule lets every eligible holder join on the same economics.

Sources: Judgment.

A side letter is a separate private agreement between the company and one investor. It can grant things like pro rata rights, information rights, or a board observer seat. Other investors often never see it. A most-favored-nation (MFN) clause promises that if anyone gets better terms, you can get them too. It only helps if it covers side letters and you have a right to be told about them.

Sources: Judgment.

Under the older pre-money SAFE, the conversion price was set on the company's pre-money share count, leaving out the other SAFEs. So every new SAFE shrank the percentage of every earlier SAFE holder, as well as the founders' percentage. Y Combinator introduced the post-money SAFE in 2018. It fixes each holder's percentage at the purchase amount divided by the post-money valuation cap. For example, $500,000 on a $10 million post-money cap is 5%, no matter how many SAFEs come later. Later SAFEs then dilute the founders and other existing holders instead.

Sources: Y Combinator post-money SAFE (Version 1.2 text, as filed with the SEC).

When a priced round happens, a post-money SAFE converts at the cap price. The cap price is based on "Company Capitalization." Y Combinator's definition says that "any increase to the Unissued Option Pool in connection with the Equity Financing shall only be included to the extent that the number of Promised Options exceeds the Unissued Option Pool prior to such increase."⁹ In practice, the SAFE holder's converted stake is set before the new pool is added. After conversion, the SAFE holder is diluted by the new investors' money like any other holder. Older pre-money SAFEs define this differently, so check the exact version.²⁹

Sources: Y Combinator post-money SAFE, "Company Capitalization" definition (Version 1.2, as filed with the SEC).

Section 5(a) of the Y Combinator post-money SAFE lets the company amend a SAFE with the consent of the "majority-in-interest of all then-outstanding Safes with the same 'Post-Money Valuation Cap' and 'Discount Rate.'" It adds three limits: "(A) the Purchase Amount may not be amended," "(B) the consent of the Investor and each holder of such Safes must be solicited (even if not obtained)," and "(C) such amendment, waiver or modification treats all such holders in the same manner."⁹ For example, if one fund holds $600,000 of a $1 million group of SAFEs, it can agree to a change for the whole group, but the change has to apply equally to everyone. The real risk is a SAFE whose text has been changed from the standard form.

Sources: Y Combinator post-money SAFE, Section 5(a) (as filed with the SEC).

When a SAFE converts in a priced round, the holder usually gets preferred stock and signs the round's documents.⁹ Information rights and pro rata rights often go only to "Major Investors" above a dollar threshold. A $50,000 SAFE holder may end up with no ongoing rights at all. Y Combinator publishes an optional pro rata side letter for this reason.

Sources: Y Combinator SAFE document set (optional pro rata side letter); see row 26.

An MFN clause in a SAFE usually lets the holder adopt better terms given in later convertible securities. If the clause only covers "SAFEs," a better deal done as a convertible note or a side letter may not trigger it. Defining the covered securities broadly, including side letter rights, closes the gap. Ask the company for written notice of every later convertible issuance.

Sources: Judgment.

Convertible notes are usually issued under one note purchase agreement that lets holders of a majority of principal amend every note. A majority can extend the maturity date, lower the cap, or agree to subordinate the notes to a new lender. If the majority holder is also the lead in the next round, it may accept terms that help its new investment more than its notes. Requiring each holder's consent for changes to economic terms prevents this.

Sources: Judgment.

Venture lenders and banks almost always want to be paid first. They usually ask existing noteholders to sign a subordination agreement that puts the notes behind the new loan. If the notes allow the company or a majority of holders to agree to this, a minority holder can be pushed down the line without its own consent. A cap on permitted senior debt in the note terms limits the damage.

Sources: Judgment.

Notes usually convert automatically in a "Qualified Financing," which means a priced round above a minimum size, such as $2 million. Insiders can design a small insider-only round that just clears the threshold at a low price, forcing conversion on bad terms. Or they can stay below the threshold to avoid converting notes they would rather keep as debt. Setting the trigger around a minimum amount of outside money makes this harder.

Sources: Judgment.

In Basho Technologies v. Georgetown Basho Investors (Del. Ch. July 6, 2018), an investor used contractual consent rights to block other funding until the company had to accept its own harsh Series G terms.³² After trial, Vice Chancellor Laster found that Georgetown and its manager Chester Davenport exercised actual control over the Series G financing. He held them liable for compensatory damages of $17,490,650 plus interest,³³ plus an additional $2.8 million for later mismanagement, for a total of $20.3 million (as reported by the Griffing Group and Goodwin).³¹³⁴ Willkie Farr's summary notes that Georgetown gained control of the voting power and a majority of board seats while providing only $2.5 million in new money.³² The Delaware Supreme Court affirmed on October 22, 2019 (Davenport v. Basho).³⁰

Sources: Basho Techs. Holdco B, LLC v. Georgetown Basho Investors, LLC, C.A. No. 11802-VCL (Del. Ch. July 6, 2018), aff'd sub nom. Davenport v. Basho (Del. 2019); Willkie Farr memo (August 2018).

Protective provisions often need approval from a majority of a series, such as "holders of a majority of Series B." If one fund owns 70% of the Series B, that vote is really one fund's decision. Requiring two unrelated holders to approve, or setting a supermajority, spreads the decision.

Sources: Judgment.

Investor agreements usually let a set majority amend the agreement for everyone. In Guilbeau v. Footprint International Holdco (Del. Ch. May 11, 2026), approximately eighty friends-and-family investors paid $25,000 per share, raising about $90 million, for Class A preferred stock with a 1.4x liquidation preference. According to the complaint, the company "purported to amend the Governance Agreement five times," each time "without informing the plaintiffs and without their consent." A later version "eliminated all of the Class A protections."⁴ Vice Chancellor Laster accepted these allegations as true only for the purpose of ruling on the motion to dismiss, and a separate April 30, 2026 ruling dealt with the contract claims.⁴³⁵ He let fiduciary duty claims against the directors go forward but dismissed the claim that one fund, with 26.4% of the voting power, was a controlling stockholder.⁵ Nothing has been proven at trial.

Sources: Guilbeau v. Footprint International Holdco, C.A. No. 2024-0968-JTL (Del. Ch. May 11, 2026); Troutman Pepper Locke memo (July 2026).

NVCA-style Investors' Rights Agreements give information rights and pro rata rights only to "Major Investors" who hold more than a set number of shares. For example, the threshold might equal a $1 million investment, so a $250,000 angel gets neither right. Osler's 2024 report also tracks how often pro rata rights go only to major holders.²⁰ A side letter can give a smaller investor these rights directly.

Sources: NVCA-style Investors' Rights Agreements filed with the SEC; Osler 2024 Deal Points Report.

A common NVCA-style clause says a waiver of the pro rata right applies "to all Investors in the same fashion if such waiver does so by its terms, notwithstanding the fact that certain Investors may nonetheless, by agreement with the Company, purchase securities in such transaction."³⁷ Without more, a majority can waive everyone's right and still buy in itself. Many filed agreements add a catch-up, such as CAVA Group's: "the Company shall provide each non-waiving Major Investor notice and the opportunity to participate on a pro rata basis."³⁸ That protection usually covers only Major Investors, so smaller holders may still be left out.

Sources: CAVA Group Investors' Rights Agreement (SEC filing, 2023); Latigo Biotherapeutics Investors' Rights Agreement, Section 6.6 (SEC filing, 2026). I could not confirm the exact wording of the October 2025 NVCA model.

A drag-along makes every party vote for a sale that the board and a set majority approve. It often also requires them to waive appraisal rights, which are the right under Delaware law to ask a court to set fair value. NVCA-style drag-alongs usually include conditions, such as the same form of payment for each share of a class and caps on each holder's liability for the buyer's claims. If those conditions are missing, a minority holder can be forced into a sale on worse terms than others.

Sources: Judgment based on NVCA-style voting agreement structure.

Each priced round often adds a board seat for the new lead. A board that starts at 2 founders and 1 investor can become 2 founders and 3 investors by Series C. Wasserman's research found that once outsiders control the board, founder-CEOs are much more likely to be replaced.³⁹ An independent seat chosen by both sides keeps the balance.

Sources: Noam Wasserman, "The Founder's Dilemma," Harvard Business Review, February 2008.

If a protective provision only says the company may not "amend the charter" without a series vote, the company may be able to merge with its own subsidiary and adopt a new charter through the merger. In Benchmark Capital Partners IV v. Vague (Del. Ch. 2002), the court allowed this because the provision did not cover mergers. Modern NVCA-style charters say the company may not take protected actions "whether by merger, consolidation or otherwise," which is why this tactic is now rare.

Sources: Benchmark Capital Partners IV, L.P. v. Vague (Del. Ch. 2002), aff'd (Del. 2003).

An insider makes a secured bridge loan with a short maturity, high interest, or conversion at a low price. If the company cannot repay, the insider can take the collateral or convert into control. In Footprint, the complaint describes January 2023 bridge loans from affiliates of the funds that were convertible into a new Class F stock.⁴ Requiring independent approval and offering other holders a chance to join the loan reduce the risk.

Sources: Guilbeau v. Footprint (Del. Ch. 2026) (allegations).

A venture partner on a startup board owes duties to the company and all its stockholders. That partner also owes duties to the fund's own investors. When the fund's interests differ from common stockholders' interests, such as in a sale that just covers the preference, the conflict is real. In Trados, the court found that VC directors had conflicts and applied the strict "entire fairness" test.⁴¹ In Footprint, at the pleading stage, the court found that five of the ten directors were conflicted.⁵

Sources: In re Trados (Del. Ch. 2013); Guilbeau v. Footprint (Del. Ch. 2026); Troutman Pepper Locke memo.

In an NVCA-style Right of First Refusal and Co-Sale Agreement, when a founder ("Key Holder") wants to sell shares, the company gets the first right to buy. Major Investors get a second right to buy whatever the company passes on. Major Investors also get a co-sale right, which lets them sell a matching portion of their own shares to the same buyer.⁴² Investors below the Major Investor threshold usually get none of these rights. For example, if a founder sells $2 million of stock to a growth fund, only large investors may get to sell alongside at that price.

Sources: NVCA model Right of First Refusal and Co-Sale Agreement structure (judgment on frequency).

In a cram-down, insiders fund at a very low valuation, often with pay-to-play terms and senior preferences, so non-participants are diluted heavily. In Footprint, the complaint alleged a Class F round at a $500 million pre-money valuation, half the $1 billion valuation used in bridge loans a few months earlier, with Class F taking 50% of the equity. Under the company's own cap table analysis, a $1.2 billion sale would leave the Class A holders with "just 4% of their original investment."⁴ Carta's State of Private Markets Q1 2026 report put the down round rate at 11.4%, "back in line with 2019 and 2020 levels," down "from a peak of 22% in 2023."⁴³

Sources: Carta State of Private Markets Q1 2026; Cooley Q2 2026 Venture Financing Report; Guilbeau v. Footprint (Del. Ch. 2026) (allegations).

A round can be "offered to everyone" on paper while insiders take most of it. In Footprint, the complaint alleged that the funds took 90% of a $500 million round and offered the last $50 million to others with three weeks to decide. Investors could see the data room only after they signed and funded.⁴⁵ At the pleading stage, the court held that this nominal offer did not defeat the claim.¹⁵ A minimum decision window, equal data, and a full pro rata allocation are the fixes.

Sources: Guilbeau v. Footprint (Del. Ch. 2026); Troutman Pepper Locke memo.

When the people setting the price are also the buyers, there is no market test. Delaware courts often apply "entire fairness" review to such deals, which requires both fair dealing and a fair price. In Basho, the court found the investor-led Series G unfair after trial.⁴⁴ In Footprint, the complaint alleged that the board passed on outside proposals from Shuler Capital, Apollo, and Ariel.⁴ An outside valuation or a vote of disinterested holders makes the price easier to defend.

Sources: Basho (Del. Ch. 2018); Guilbeau v. Footprint (Del. Ch. 2026) (allegations).

Charters usually let a set majority of preferred holders, often voting together as one class, force every series to convert to common. That wipes out all liquidation preferences. A large holder of a later series can use this before a recapitalization to erase older series' preferences while protecting its own through the new round. A separate vote by each series blocks this.

Sources: NVCA-style charter structure.

In a reverse split, for example 1 new share for every 10,000 old shares, a holder of 5,000 shares ends up with half a share. Delaware law lets a company pay cash for fractional shares instead of issuing them. If the value used for that cash is low, small holders are pushed out cheaply. A fair, independent valuation of the fractions is the fix.

Sources: Judgment.

After a recapitalization, management's old equity may be nearly worthless, so the new investors often approve a large new grant to keep the team. That new equity dilutes old investors along with everyone else. For example, a new pool of 15% after a recap comes out of holders who did not join the rescue. Consent rights over big pool increases give old investors a voice.

Sources: Judgment.

If the sale price is near or below the total liquidation preference, preferred holders may want a quick sale while common holders would rather wait. In In re Trados (Del. Ch. 2013), SDL bought Trados for $60 million. A management incentive plan took $7.8 million, preferred holders got $52.2 million against a $57.9 million preference, and common got nothing. Without the plan, common would have received $2.1 million.⁴¹⁴⁶ Vice Chancellor Laster found the process flawed, but he held that the merger was entirely fair because the common stock had no economic value before the merger.⁴⁵

Sources: In re Trados Inc. Shareholder Litigation, 73 A.3d 17 (Del. Ch. 2013).

A management carve-out plan sets aside a slice of the sale price for executives so they will support a sale that pays common little or nothing. In Trados, the plan took the first $7.8 million of the $60 million price.⁴¹ The court said the plan's design was "evidence that the Board dealt unfairly with the common."²⁵ Capping the plan and requiring independent approval help.

Sources: In re Trados (Del. Ch. 2013).

A buyer can pay less for the company's stock and more in retention bonuses, consulting fees, or earnouts for chosen people. Earnouts are later payments that depend on hitting targets. For example, a $20 million deal might be split into $8 million for stockholders and $12 million in packages for five key people. Holders outside that group get a share of only the $8 million. Full disclosure of all side payments and consent rights over the split are the fixes.

Sources: Judgment.

In an acquihire, a larger company hires the team and may license or buy some assets, but it does not buy the company's stock. Little money reaches the company itself, so investors get little. Y Combinator's post-money SAFE pays at least the purchase amount in a "Liquidity Event,"⁹ but that only helps if the deal counts as one and the company receives enough money. Clear definitions that pull these deals into the sale provisions work better than a new "minimum return" clause.

Sources: Y Combinator post-money SAFE (Liquidity Event provisions).

If the company sells its assets and then dissolves, the money flows through the company's creditors first and then out to stockholders under the charter's liquidation rules. Documents that treat only a stock sale or merger as a "sale" may handle an asset sale differently. NVCA-style charters usually count a sale of all or substantially all assets as a "Deemed Liquidation Event." Check that your documents do the same.

Sources: Judgment based on NVCA-style charter structure.

A buyer may offer some holders its own stock, which can grow in value and may delay taxes, while others get only cash. Chosen holders can then share in future upside that others give up. A drag-along that requires the same form of payment for every share of a class prevents this.

Sources: Judgment.

If the lead investor controls the buyer, or the buyer is another of its portfolio companies, the lead is on both sides of the deal. Delaware courts look hard at such deals. An independent committee and a real market check help show the price was fair.

Sources: Judgment.

Most venture funds have a 10-year term, often with extensions. A fund in year 9 needs to return cash to its own investors. It may push for a sale that a younger fund would wait on. In ODN, the court discussed how the investor's own fundraising timeline shaped its goals.⁴⁷⁴⁸ Asking a lead about fund age and reserves before signing helps you predict this.

Sources: Frederick Hsu Living Trust v. ODN (Del. Ch. 2017) (discussion of Oak Hill's fundraising goals).

A redemption right lets an investor force the company to buy back its shares, which can push the company toward stockpiling cash instead of growing.²⁶ In Frederick Hsu Living Trust v. ODN Holding Corp., Oak Hill held $150 million of preferred stock with a redemption right that became exercisable after five years. The company sold business lines and saved cash to fund redemptions.²⁶⁴⁹⁵⁰ In April 2017, Vice Chancellor Laster let fiduciary duty claims proceed.¹⁵¹ After trial, in a May 4, 2020 opinion, he held that "the defendants proved that their conduct was entirely fair," finding that the company declined mainly because of industry headwinds and competition.³⁴⁸⁵² The case shows the risk of a redemption right, but it does not show wrongdoing by Oak Hill.

Sources: Frederick Hsu Living Trust v. ODN Holding Corp. (Del. Ch. Apr. 14, 2017, corrected Apr. 25, 2017); post-trial opinion (Del. Ch. May 4, 2020), as reported by Paul Weiss, National Law Review, and Cornerstone Research.

A secured lender can foreclose on its collateral or buy the assets in a quick sale, sometimes by "credit bidding" what it is owed instead of paying cash. If that lender is also an insider, it may prefer a fast, quiet sale to itself. Independent approval of insider loans and a real marketing process protect other holders.

Sources: Judgment.

In a secondary sale, a new investor buys existing shares instead of new ones. If it buys only from chosen holders, such as founders or early funds, others lose a chance to sell at that price. A right to join any company-run tender offer on the same terms spreads the opportunity.

Sources: Judgment.

If one holder sells common stock at a deep discount, that price can become a data point for later company valuations (often called 409A valuations, after the tax code section) and in negotiations with new investors. Transfer limits on all holders, not just founders, reduce this risk.

Sources: Judgment.

When a large early investor with pro rata rights chooses not to invest in the next round, new investors may read that as a warning. This is strongest when the early investor is a big fund known for backing winners. Asking leads about their follow-on habits and building a broad investor base reduce the effect.

Sources: Judgment.

An insider with veto rights can block outside money by talking the company down or insisting on approving every new investor. In Basho, Willkie Farr's summary says the investor blocked "funding from third parties by discouraging competing investors from submitting term sheets and insisting on vetting every" potential investor.³² The court said the investor's "hard control" demands and "brusque and unprofessional manner" convinced other investors to pass.⁵³ Keeping written records of every outside offer creates evidence if a dispute comes up.

Sources: Basho (Del. Ch. 2018); Willkie Farr memo (August 2018).

When a deal needs one investor's consent, that investor can delay or ask for something in return, such as a fee, extra shares, or a better position. Basho shows how far this can go when the company is short of cash. Fewer individual vetoes, and vetoes that expire, limit the leverage.

Sources: Basho (Del. Ch. 2018).

A super pro rata right lets an investor buy more than its ownership share in later rounds, such as 2x its pro rata amount. In a hot round with limited room, that leaves less for other holders. Equal pro rata rights keep the playing field level.

Sources: Judgment.

Venture funds usually refuse to promise they will not invest in competitors. A fund with a board seat at your company could later back a rival. Confidentiality duties still apply, and NVCA-style agreements often say how board information can be shared. Limits on information rights for investors who back competitors are worth asking for.

Sources: Judgment.

At the first priced round, investors often ask founders to put already-owned shares back on a vesting schedule, such as four years with credit for one year served. The company gets a right to buy back unvested shares at cost if the founder leaves. Section 83(b) of the Internal Revenue Code lets a holder elect within 30 days of a transfer to be taxed now, not as shares vest. Internal Revenue Service Revenue Ruling 2007-49 indicates that adding vesting to shares that are already fully vested is not a new transfer. Even so, many advisors file a "protective" 83(b) election anyway because the cost is low. Ask for credit for time already served and acceleration on a sale.

Sources: Internal Revenue Code Section 83(b); Revenue Ruling 2007-49 (practitioner views vary).

Single-trigger acceleration vests shares when the company is sold. Double-trigger acceleration needs two events: a sale, then a firing without cause or a "good reason" resignation within a set period, often 12 months. If "good reason" is defined narrowly, or the sale definition leaves out asset sales, the second trigger may never fire. For example, a founder demoted to a smaller role might not qualify under a narrow definition.

Sources: Judgment.

Founder restricted stock agreements usually let the company buy back unvested shares at the original price when the founder leaves. In Fetras v. Richards (Del. Ch. Sept. 30, 2026), Patrick Fetras bought 1.5 million shares of Lasso Inc. for $0.0001 per share, or $150 total. The agreement let Lasso repurchase his unvested shares if he left "for any reason . . . or for no reason, with or without cause." His three co-founders gave him a 30-day "Cure Notice," then fired him for cause and bought back all 1.5 million shares for $150. The court dismissed the case, saying his claims "arise principally from the terms of the restricted stock purchase agreement."⁶ The lesson is that the contract terms control, and a cure period alone did not protect him.

Sources: Fetras v. Richards, C.A. No. 2025-1264-LWW (Del. Ch. Sept. 30, 2026).

"Bad leaver" clauses, more common in Europe and in private equity deals, let the company buy back even vested shares, sometimes at the lower of cost or fair value, if the holder leaves on bad terms. In US venture deals, standard documents usually reach only unvested shares. If a bad leaver clause appears, the price and the definition of "bad leaver" are the key terms to negotiate.

Sources: Judgment.

Most option plans give a departing employee 90 days to exercise vested options, paying the strike price and sometimes tax. After that, the options expire.⁵⁶⁵⁷⁵⁸ The 90-day rule comes from Internal Revenue Code Section 422, which says an incentive stock option must be exercised within three months after employment ends to keep its special tax treatment.⁵⁶⁵⁷ Carta's 2022 Employee Stock Options Report found 85% of grants had a 90-day window, and its Q4 2023 data showed 81% of terminated options did.⁵⁴⁵⁵ For example, exercising 200,000 options at $1.50 costs $300,000, which many people cannot pay in 90 days. A longer window turns incentive stock options into non-qualified options but gives the holder time.⁵⁶⁵⁹

Sources: Carta 2022 Employee Stock Options Report; Carta State of Private Markets Q4 2023; Internal Revenue Code Section 422(a)(2).

After dilution, boards often give founders new "refresh" grants to restore their incentive. These grants usually start a new four-year schedule, so a founder who leaves early forfeits most of them. Some immediate vesting and the same acceleration as the founder's original stock make the grant fairer.

Sources: Judgment.

In most venture-backed companies, the board can remove the CEO by majority vote. Wasserman's February 2008 Harvard Business Review article, "The Founder's Dilemma," found that "by the time the ventures were three years old, 50% of founders were no longer the CEO; in year four, only 40% were still in the corner office; and fewer than 25% led their companies' initial public offerings."⁶¹ In the same article, Wasserman wrote: "Four out of five entrepreneurs, my research shows, are forced to step down from the CEO's post."⁶² Severance, acceleration, and a balanced board are the main protections.

Sources: Noam Wasserman, "The Founder's Dilemma," Harvard Business Review 86, no. 2 (February 2008): 102 to 109; Wasserman talk, Business of Software.

A common NVCA-style voting agreement fills one board seat with "the Company's Chief Executive Officer" (the "CEO Director"). It says that if that person "shall cease to serve as the Chief Executive Officer," stockholders must vote "to remove the former Chief Executive Officer from the Board if such person has not resigned" and to elect the new CEO.⁶³⁶⁴⁶⁵ So a founder fired as CEO loses that board seat too. A separate seat elected by common stockholders keeps a founder voice on the board. Note that this CEO seat is a bracketed option in the model, not a required term.⁶⁴

Sources: NVCA-style voting agreements filed with the SEC (for example, Proto Labs and 6d bytes); CommonAccord copy of the NVCA 2020 Voting Agreement form.

A founder seat may be tied to staying employed or to owning a minimum number of shares. If the founder leaves or is diluted below that line, the seat goes away or moves to someone else. Tying the seat to keeping a small share of the original stock is more durable.

Sources: Judgment.

In the voting agreement, each stockholder promises to vote for the agreed directors and approve certain actions. If they fail to vote, the agreement names officers, often the CEO and CFO (chief financial officer), as proxies who can vote their shares for them.⁶³ Limiting the proxy to the specific matters in the agreement, and ending it at an IPO (initial public offering) or sale, keeps its reach narrow.

Sources: Proto Labs Voting Agreement (SEC filing).

Standard protective provisions cover big structural actions, such as new senior stock, a sale, or changes to the charter. Some investors also ask for vetoes over budgets, executive hiring, or big contracts. Those operating vetoes let one investor steer daily business. Keeping vetoes to the standard NVCA list and adding sunsets limits them.

Sources: Judgment.

On August 10, 2017, Benchmark sued former Uber CEO Travis Kalanick in the Delaware Court of Chancery, alleging fraud, breach of fiduciary duty, and breach of contract.⁶⁸⁶⁹ Benchmark asked the court to void a June 2016 change that let Kalanick fill three new board seats and to remove him from the board.⁶⁶⁶⁸ Benchmark claimed it would not have approved the seats if it had known about alleged misconduct.⁷⁰ Kalanick, who had resigned as CEO in June 2017, called the claims a "fabrication."⁶⁷⁶⁸ The court never ruled on whether the fraud claims were true.

Sources: Reuters via VentureBeat (Aug. 10, 2017); Forbes (Aug. 10, 2017); Fortune (Aug. 10 and 19, 2017). Case: Benchmark Capital Partners VII LP v. Kalanick, C.A. No. 2017-0575.

Venture investors talk often with each other and with buyers. A negative comment about a departed founder can affect future fundraising or jobs. Mutual non-disparagement clauses in a separation agreement give some protection, though they are hard to enforce.

Sources: Judgment.

A term sheet may say it expires in a day or two. That keeps a founder from showing it to other investors to get a better offer. Most term sheets are not binding on price, so the deadline is a pressure tactic. Asking for a week or more is common, and serious investors usually agree.

Sources: Judgment.

Signed term sheets often include a binding "no-shop" clause that bars talks with other investors for 30 to 60 days. During that time, the investor can find problems in diligence and lower the price, knowing the founder has paused other talks. A short no-shop that ends automatically if terms change keeps your options open.

Sources: Judgment.

NVCA-style term sheets often say the company will pay the lead investor's legal fees at closing, up to a cap. That cost comes out of the money the company just raised. Negotiating a firm dollar cap, and making it apply even if the deal fails, controls the cost.

Sources: Judgment.

Many venture investors will not sign non-disclosure agreements (NDAs) at the first meeting. A "prospective investor" can collect detailed numbers and product plans and then pass. Sharing only high-level data until a term sheet is signed, and using an NDA for sensitive material, limits the risk.

Sources: Judgment.

California Business and Professions Code Section 16600 voids most non-competes. Section 16601 allows one for "any person who sells the goodwill of a business, or any owner of a business entity selling or otherwise disposing of all of his or her ownership interest," or an owner of an entity that sells all or substantially all of its operating assets with goodwill. Freshfields notes that the non-compete must be tied to the sale itself, not to employment. A founder who sells 10% of their shares to an investor in a Series A has not sold all of their interest. Outside California, state rules vary widely, so the governing state matters.

Sources: California Business and Professions Code Sections 16600 and 16601; Freshfields, "Non Competes in California: A Practical Guide."

IP (intellectual property) assignment agreements transfer to the company any inventions related to its business. A broad version can reach side projects or code written before the company existed. Listing prior inventions on the schedule protects them. California Labor Code Section 2870 voids assignment of inventions made entirely on your own time without company equipment or secrets, unless they relate to the company's business.

Sources: California Labor Code Section 2870 (judgment on frequency).

Investors sometimes ask founders to make personal promises in the purchase agreement, such as personal "representations" about the company, or lenders ask for personal guarantees. A personal guarantee means a founder's own savings can be reached if the company fails. In venture deals, the company, not the founder, normally makes these promises.

Sources: Judgment.

Under an NVCA-style Right of First Refusal and Co-Sale Agreement, a founder who wants to sell must first offer the shares to the company and then to Major Investors on the same terms. Major Investors can also join the sale through co-sale rights. That can slow a sale or scare off buyers. Standard forms usually allow transfers to family trusts for estate planning. A carve-out for a set portion of shares has to be negotiated.

Sources: NVCA model Right of First Refusal and Co-Sale Agreement structure.

Internal Revenue Code Section 1202(c)(3)(B) says stock is not QSBS if, during the 2-year period starting 1 year before it is issued, the company redeems stock worth more than 5% of the value of all its stock. Treasury Regulation 1.1202-2(b) ignores buybacks unless more than $10,000 is paid and more than 2% of all stock is bought. A separate rule in Section 1202(c)(3)(A) covers buybacks from the same taxpayer or a related person in a 4-year window starting 2 years before issuance. For stock acquired after July 4, 2025, the One Big Beautiful Bill Act raised the exclusion to the greater of $15 million or 10 times basis and allows 50% exclusion after 3 years and 75% after 4 years. For example, a company worth $50 million that buys back $3 million of stock (6%) can disqualify all stock it issues within a year on either side of that buyback.

Sources: Internal Revenue Code Section 1202(c)(3); Treasury Regulation 1.1202-2; Holland & Knight memo (October 2025); Spencer Fane and Mintz memos on the One Big Beautiful Bill Act (July 2025).

If you receive unvested stock and do not file an 83(b) election within 30 days, you owe ordinary income tax on the value of each portion as it vests. If the company's value rises fast, that tax can be large, and you may not be able to sell shares to pay it. Late grants after a big round raise the same problem. Getting tax advice at every grant or vesting change is the fix.

Sources: Internal Revenue Code Section 83(b).

Venture debt agreements usually include at least one "subjective" default. Orrick partner Dolph Hellman said "most venture debt lenders insist on at least one Subjective Default," and named "material adverse change" and "investor abandonment" as the two main types. A typical investor abandonment clause triggers when the lender decides, in its "good faith judgment," that it is "the clear intention of borrower's investors to not continue to fund borrower." Hellman added that it is "extremely rare that a lender will rely on a Subjective Default" to call a loan. The risk is low most of the time but very high in the one moment when funding dries up.

Sources: Orrick and Spinta Capital, "Venture Debt Default Provisions" (June 2018).

Internal Revenue Code Section 6672, the Trust Fund Recovery Penalty, makes any "responsible person" who willfully fails to pay over withheld taxes personally liable for 100% of the unpaid amount. Withheld taxes include employee income tax and the employee share of Social Security and Medicare. A "responsible person" is anyone with power over which bills get paid. That can include officers, directors, and sometimes investors. For example, if a company withholds $200,000 from paychecks and uses it to pay rent instead, the CEO can owe the full $200,000 personally. Paying withheld taxes first is the main protection.

Sources: Internal Revenue Code Section 6672.

D&O (directors and officers) insurance usually covers only claims made while the policy is active. A "tail" or "run-off" policy extends coverage for claims made after the company stops operating. Many policies exclude claims by one insured person against another, called the "insured vs. insured" exclusion. If there is no exception for a bankruptcy trustee or creditors' committee, a trustee's suit against directors might not be covered. A broker should review these terms before any wind-down.

Sources: Judgment based on standard D&O policy structure.

When a company nears insolvency, investor directors may resign to limit their own exposure. Remaining directors and officers must make hard calls about paying creditors and winding down. A board-approved wind-down plan and indemnification that survives the shutdown, backed by insurance, protect those who stay.

Sources: Judgment.

An orderly shutdown takes cash for final payroll, taxes, lawyers, and records. It can take months of unpaid work. If investors will not fund it, founders often do it alone. Setting aside shutdown cash early and getting a board-approved budget protects founders.

Sources: Judgment.