We received a pre-emptive term sheet for a Series B of a raise of around $25m at around a $90m Pre. The lead VC has asked for Veto Rights to block an acquisition if the company would get less than 2x a return on their investment in that acquisition.

Some companies are able to negotiate a time bound around the investor veto – like it goes away at Series C or it goes away in 18-24 months.  The drag-along clause should have the same hurdle – some companies forget to also include it there so that the investor is subject to be dragged along in a sale above the hurdle. Sophisticated Series B investors know that giving an individual investor a veto is bad precedent for future rounds (the Series C and D leads will ask for the same) and this ultimately becomes a negative for the Series B investor.  If there are 2 or 3 other sophisticated institutional investors then it is reasonable to only require 1 or 2 of them (plus others to get the majority or super majority of the preferred as a class, whatever is negotiated) to approve an M&A event, particularly if the existing investors are participating in the new round of financing – the risk of mis-alignment should be relatively small at the Series B stage.  These issue get harder though at Series C, D, E, etc. when the valuation is skyrocketing.