Control terms

Founders do not often lose their companies in a sale. They lose them in a board meeting. A board can replace the CEO with a majority vote, and the CEO is often the founder. The economics terms decide who gets the money. The control terms in this lesson decide who makes the decisions, and who can stop them.

The board of directors

The board of directors hires and fires the CEO, and it approves big decisions such as a sale of the company. Thus board composition is the most important control term. A term sheet says how many seats the board has, and which group of stockholders elects each seat. The usual patterns by stage:

Stage	Typical board
Pre-seed, on SAFEs	Founders only. A SAFE gives no board seat.
Priced seed	The common stock elects most seats. Sometimes the seed investor gets one seat.
Series A, founder-friendly	Three seats: two that common elects, one that the Series A elects. This “2-1” board is the YC clean template.
Series A, NVCA model	Five seats: two investors, one common director, the CEO, and one independent director.
Series B and later	More seats, for new investors and independent directors. The common directors often become a minority.

These are patterns, not survey data. Carta describes another common early-stage board: two founders, one lead investor, and one independent director that the two sides agree on. For one data point, the Canadian law firm Osler found an average board of 4.9 directors in its 2025 deals.

The 2-2-1 board

YC gives a warning about the 2-2-1 board: two founders, two investors, and one independent director. YC says that this board is how “founders most often lose control,” because “the founders can be fired from their own company.” The two sides each hold two votes, so the independent director decides each tie. If that director agrees with the investors, the vote to replace the CEO passes 3 to 2.

Thus the question is not only how many seats you hold. It is also who selects the independent director. In a clean Series A, the common directors must approve the independent director.

Simulator

Who controls the board

Pick a board and a motion. The founders and the investors disagree. See which side wins the vote.

Board: founder, investor, and independent seats

Motion

The independent director votes with

The vote to replace the founder as CEO

NoFounder
NoFounder
YesInvestor
YesInvestor
YesIndependent

Founder seat
Investor seat
Independent seat

Votes for: 3 of 5
Result: Passes
Who decides: Independent

The founders hold 2 of 5 seats and the investors hold 2. Each side has the same number of seats, so the independent director decides. Here the independent votes with the investors.

The motion passes 3 to 2. The founder is no longer the CEO of the company that the founder started.

Investor-director approvals

Some term sheets give the investor director a personal veto on board decisions. The NVCA list of such decisions includes loans and debt of more than a set limit. It also includes executive hires and pay, a change of the business, licenses of important IP, and large strategic deals. YC calls an investor-director veto on budgets, executive hires, and pivots a control red flag.

For example, the board votes 2 to 1 to hire a VP of Sales. The term sheet says that the investor director must approve executive hires, and that director votes no. Thus the hire does not occur, but you won the vote. In the widget, select “Hire an executive” on the 2-1 board. Then change the veto from “Yes” to “No.”

Protective provisions: the stockholder vetoes

Protective provisions are a list of actions that the company cannot do without a separate approval from the preferred holders. The requisite holders, a set majority of the preferred, must give this approval. The NVCA list includes these actions:

Sell or liquidate the company
Change the charter or bylaws in a way that hurts the preferred
Make a new class of stock that is senior or equal to the preferred
Buy back stock or pay dividends
Borrow more than a set limit
Change the number of board seats.

YC says that the most important vetoes are the veto on new financings and the veto on a sale of the company. These vetoes are standard, because investors want to approve the events that change the value of their shares. Examine two details:

The threshold. Make sure that one small investor cannot block an action alone.
The scope. Make sure that the vetoes cover big events only, not daily operations.

For example, you want a $3M bridge from new angels. The protective provisions cover all new stock. The Series A lead holds 60% of the preferred, and the threshold is a majority. Thus the lead alone can stop the bridge.

Drag-along

A drag-along makes all parties to the agreement vote for a sale that the necessary holders approve. Under the NVCA model term sheet, the parties are the preferred holders and all holders of more than 1% of the common stock. That group usually includes the founders. With a drag-along, a small holder cannot block a sale that most holders want.

The founders’ risk is a sale that they do not want. For example, a buyer offers $28M, and the preferences total $30M, so the common holders get $0. If the board and a majority of the preferred can start the drag-along, the founders must vote yes and sign.

The NVCA documents give founders these protections:

The liability of each holder is “several (and not joint).” Thus no holder pays the part of a claim that belongs to another holder. Each holder pays at most its pro rata part of a claim.
The June 2026 Voting Agreement also caps the liability at what the holder gets in the sale, except for fraud.
An optional clause adds one more approval: a majority of the common that the “Qualified Key Holders” hold. These are the key holders who still work for the company.

Ask that a drag-along needs three approvals: the board, the requisite holders, and a majority of the common that the team holds. Ask your lawyer to check these protections in the final Voting Agreement.

Right of first refusal and co-sale

Two rights control what happens when a founder sells shares to an outsider:

ROFR: The holder wants to sell. First the company, and then the investors, can buy those shares at the same price and on the same terms. The NVCA agreement applies it to founders and employees with 1% or more of the common.
Co-sale: If the company and the investors do not buy, the investors can sell some of their own shares in the same sale. This is also called “tag-along.”

The NVCA co-sale formula gives the investors who join the sale a part in proportion to their shares:

Investors' part
  = their shares
    ÷ (their shares + seller shares)

For example, a founder with 3,000,000 shares agrees to sell 500,000 shares at $4 to a buyer. Investors with 2,000,000 shares use their co-sale right. Their part is 2,000,000 ÷ 5,000,000 = 40%, so they sell 200,000 of the 500,000 shares. The founder sells only 300,000.

Information rights

Information rights give investors financial reports on a schedule. A major investor is an investor that put in more than a set dollar threshold. In the NVCA model, major investors get annual and quarterly financial statements, monthly statements as an option, and a budget for the next year. McCarter & English says that companies usually send the monthly and quarterly reports 30 to 45 days after the period ends. The annual statements come 90 to 120 days after the year ends.

A management rights letter is a separate letter. Many venture funds must have one for US pension law (ERISA). Founders usually do not negotiate it.

Pro rata rights

A pro rata right lets a major investor buy sufficient shares in the next round to keep its ownership percentage. For example, an investor holds 12% before a $20M Series B. Its pro rata right lets it put in 12% × $20M = $2.4M.

Super pro rata, for example 2x, lets an investor buy more than its share: $4.8M in this example, almost a quarter of the round. That leaves less space for a new lead investor, and many leads want a set ownership level. Give pro rata rights to major investors only, and only at pro rata. The lesson on pro rata rights has the full math.

Registration rights

Registration rights let investors make the company register their shares with the SEC, so that they can sell the shares on a public market. There are three types:

Demand: The investors can make the company register their shares.
S-3: A shorter registration that a public company can use.
Piggyback: The investors can add their shares to a registration that the company does.

These rights are standard, and they matter only near an IPO. Founders almost never negotiate them, and investors almost never use them before an IPO. The investors also agree not to sell for up to 180 days after the IPO, the lock-up.

Founder vesting and re-vesting

Investors want founder shares to vest, so that a founder who leaves early does not keep all of the shares. The standard schedule is four years with a one-year cliff, as the lesson on vesting and cliffs explains. If you worked on the company before the round, investors usually give credit for part of that time. The credit is usually up to 25% of the shares, and the rest vests monthly over three or four years.

Founder re-vesting puts vested founder shares back on a schedule. For example, a founder holds 4,000,000 shares and is two years into a four-year schedule, so 2,000,000 shares are vested. The Series A asks for re-vesting with 25% credit. Then 1,000,000 shares vest at the closing, and the other 3,000,000 vest monthly over 36 months.

Predict first

The founder leaves 6 months after the closing. How many shares does the founder keep with re-vesting?

Type a guess before you continue. A guess first, even a wrong one, makes the answer easier to remember.

At the closing:
  25% × 4,000,000 = 1,000,000 vest
Then, monthly over 36 months:
  the other 3,000,000 vest

The founder leaves 6 months later.
With re-vesting:
  1,000,000 + 3,000,000 × 6 ÷ 36
  = 1,500,000 shares
With the original schedule:
  4,000,000 × 30 ÷ 48
  = 2,500,000 shares

Re-vesting cost this founder 1,000,000 shares. In its 2025 data, Osler found re-vesting after the early rounds “exceptionally rare.” Full re-vesting with no credit for time served is a red flag.

The Series Seed term sheet uses double-trigger acceleration as its default. With double-trigger acceleration, unvested shares vest if a sale occurs and the buyer then fires the founder without cause.

The no-shop

The no-shop is a binding promise: for a set number of days, the company does not look for other investors or a buyer. McCarter & English gives a range of 30 to 90 days, usually 45 or 60. The Series Seed form uses 30 days. The NVCA text also makes you tell the lead investor about each inquiry from another investor.

A no-shop of less than 45 days can end before the closing. That is a reason for 45 to 60 days in a Series A. A no-shop of more than 60 days is a red flag. It lets the deal “drag on too long,” and during that time you cannot talk to other investors. The confidentiality clause is also binding. The lesson on reading a term sheet covers it, with expenses and the expiration date.

Practice

Work it out

A founder with 4,000,000 shares wants to sell 600,000 shares to a buyer. The company and the investors do not buy them. Investors with 1,000,000 shares use their co-sale right. How many shares can the founder sell?