Amongst other tigns VCs typically look for three types of rights regarding equity in a term sheet that get transferred to an Investment Agreement. Most of my transactions have been with European VCs, so some of my naming is slightly European/UK specific, but the principles are generally the same around the world:
* Drag rights - so that under certain circumstances they can force a sale even if the founders (who might own the majority of equity) don't want to. Typically this is set 3-5 years into the future. This is because the VC doesn't want to be sitting on illiquid private equity once their fund returns and the partners typically get 20% of any exit. VC funds have a target lifetime, so the VCs argue this is key to their business model.
* Approval on any sale of new/existing equity. In a UK company this would be typically enshrined in the both an investment agreement and as a class-consent within the Articles of Association. VCs normally end up controlling the board of start-ups (either in themselves or 'their' NXDs that too often follow the VCs). The VCs don't want you to sell too early, or raise new money in a market or at price they think is wrong. They would justify this by saying they are risking the capital in the business and would see this as reasonable.
* Tag-along: if anyone sells any equity they have the right to sell a proportionate amount at that price. There are typically some 'permitted transfers' e.g. VCs transferring equity between their internal funds. This basically comes out of them not wanting anyone else to get an exit (and a payday before they do).
* Drag rights - so that under certain circumstances they can force a sale even if the founders (who might own the majority of equity) don't want to. Typically this is set 3-5 years into the future. This is because the VC doesn't want to be sitting on illiquid private equity once their fund returns and the partners typically get 20% of any exit. VC funds have a target lifetime, so the VCs argue this is key to their business model.
* Approval on any sale of new/existing equity. In a UK company this would be typically enshrined in the both an investment agreement and as a class-consent within the Articles of Association. VCs normally end up controlling the board of start-ups (either in themselves or 'their' NXDs that too often follow the VCs). The VCs don't want you to sell too early, or raise new money in a market or at price they think is wrong. They would justify this by saying they are risking the capital in the business and would see this as reasonable.
* Tag-along: if anyone sells any equity they have the right to sell a proportionate amount at that price. There are typically some 'permitted transfers' e.g. VCs transferring equity between their internal funds. This basically comes out of them not wanting anyone else to get an exit (and a payday before they do).