Investor consents – shaping governance and strategic decision-making

In venture capital deals, investor consents are a key mechanism for balancing governance and strategic decision-making. These provisions give investors a say in critical decisions, ensuring their investment is protected while leaving the management team free to operate the business day-to-day. 

Investor consents typically apply both at the shareholder level (through the consent of an investor majority) and at the board level (through the role of an investor director), creating a layered system of oversight.

For founders, investor consents ensure key decisions are collaborative but must be carefully negotiated to avoid unnecessary interference in operational matters. For investors, these rights safeguard their equity and strategic interests. This article in our ‘Anatomy of a term sheet’ series explores how investor consents are structured, their practical application, and their implications for founders and investors.

What are investor consents?

Investor consents are contractual rights that require specific investor approval for certain actions. These rights typically apply to high-impact decisions that could materially affect the company’s valuation, governance, or capital structure.

Investor consents are often structured through two layers of oversight:

1. Investor majority at the shareholder level: a group of investors holding a defined percentage of shares (e.g., 50% or 75% of a share class) must approve certain actions.
2. Investor director at the board level: an investor-appointed board member may have veto rights over specific decisions, exercised as part of their board duties.

This dual structure ensures that investors retain both financial and governance oversight.

Key decisions typically requiring investor consent

Investor consents focus on strategic, financial, and governance matters. Common decisions requiring consent include:

Capital structure

• Issuing new shares or convertible securities.
• Creating new share classes or altering existing rights.
• Share buybacks or reductions in share capital.

Corporate transactions

• Mergers, acquisitions, or asset disposals.
• Liquidation or winding up the company.
• Entering into joint ventures or strategic partnerships.

Major financial commitments

• Approving budgets or business plans.
• Borrowing above a specified threshold.
• Making significant capital expenditures.

Governance changes

• Amending the company’s articles of association.
• Appointing or removing directors, including the CEO.
• Changes to the board’s composition or powers.

Management incentives

• Establishing or amending share option schemes.
• Approving executive compensation packages.

Investor consent at the shareholder level (investor majority)

At the shareholder level, investor consents are typically exercised by an investor majority—a defined group of investors holding a certain percentage of a particular share class.

The investor majority threshold is often tailored to the decision’s importance:

• Routine decisions: 50% majority of the relevant share class.
• Critical decisions: supermajority (e.g., 75%) to ensure broad agreement.

Investor consent at the board level (investor director)

Investors often secure representation on the company’s board, typically through the appointment of an investor director. This director may be granted specific veto rights over certain board decisions, supplementing the rights of the investor majority.

Structuring investor consents

Balancing oversight and efficiency

• Founders aim to ensure operational decisions remain within management’s control. Investors, meanwhile, seek oversight on key strategic matters.
• Provisions should focus on significant, high-impact decisions, avoiding interference with day-to-day operations.

Tailored approval thresholds

• For shareholder-level consents, thresholds should reflect the importance of the decision. For example, issuing new shares might require a 75% supermajority, while budget approvals could need only a majority vote.

Streamlined processes

• Clear procedures for obtaining consents should be defined, including notice periods, timelines for responses, and mechanisms for resolving disputes.

Exemptions for routine matters

Day-to-day operational decisions, such as routine expenditures or small-scale borrowing, should not require investor consent. Thresholds should be set to ensure operational flexibility.

Practical considerations

Avoiding bottlenecks

Overly restrictive thresholds (e.g., requiring unanimous approval) can create decision-making deadlocks, particularly in larger investor syndicates. Majority or supermajority thresholds are typically more practical.

Flexibility for urgent decisions

Certain time-sensitive actions, such as emergency funding or signing critical contracts, may require exemptions from prior approval. These decisions can be subject to post-event notification instead.

Alignment between board and shareholder rights

Duplication of rights at both levels can lead to inefficiencies. Careful drafting is required to ensure rights are complementary, not redundant.

Analysis: founders’ perspective vs investors’ perspective 

In summary

Investor consents are a fundamental part of venture capital term sheets, balancing the need for investor oversight with the founders’ ability to operate the business effectively. By carefully defining the scope of consent rights and aligning shareholder- and board-level controls, founders and investors can create a governance framework that supports both growth and collaboration.

Read the next article in our ‘Anatomy of a term sheet’ series, where we’ll examine warranties, analysing how these commitments allocate risk and ensure transparency in venture capital transactions. 

If you're navigating the complexities of venture capital term sheets or preparing your business for investment, our experienced team is here to help. Get in touch to discuss how we can support you in securing the right deal for your business.