What is market control?

Early stage investors achieve control through ownership.  What terms do later stage or mid-market buyout firms use to gain control?

• When ownership alone will not provide enough control in an investment, what specific terms do investors lean toward to get some control at the board level for their investment dollars?

• Answer:

  Generally even early stage investors do not buy large enough stakes to exert control through ownership.  Rather they negotiate for protective provisions that allow them to control particular actions a company might want to take.  For example, a Series A investor who owns all of the Series A stock, which if converted to common stock would be say 15% of the company, may have a protective provision which requires the owners of the company to obtain approval of the owners of a majority of the Series A stock for any sale of the company or further equity round.  This in effect gives the Series A investor very significant control since they can unilaterally veto a sale or additional venture round.  This is just one example and there are a lot of other protective provisions that are very common.  You can check out the NVCA docs (http://www.nvca.org/index.php?option=com_content&view=article&id=108&Itemid=136) if you would like some examples or read the posts at http://www.startupcompanylawyer.com if you want more depth. Also, please remember that this is not legal advice and that I'm not your lawyer.  Hire a lawyer if you need personal help with one of these issues.