Investors have two major provisions that prevent the company entering transactions that could harm their investment the "protective provisions" and the "investor director approval" provisions.

Protective provisions require investor approval of certain corporate actions. They are designed to protect the investors (usually minority owners of the company) and give the investors more control. They require a certain percentage of the investors to approve major transactions that could seriously impact the preferred stock, including dissolving the company, amending bylaws or articles of incorporation, merging or selling the company, issuing new shares (or convertible securities) that have better rights than the preferred (or equal rights), borrowing money or issuing convertible notes over a certain threshold, and others.

Protective provisions can seriously limit a company's flexibility, so founders should be careful to make sure they're reasonable and fair to the founders. Here are a few tips:

Limit the Percentage. Try to reduce the percentage of investors required to approve a transaction. In a deal with multiple investors, requiring anything greater than a majority can give small investors a veto right over transactions that everyone else wants and hold up the company from moving forward. It will be tough to get investors to agree to anything less than a majority vote, but anything greater than a majority can cause more trouble than it's worth.

Raise the Debt Threshold. If the company needs to raise money in the future, it can try to do so through a convertible debt round. By increasing the debt threshold - i.e., the amount a company can raise without investor approval - the company gives itself the flexibility to raise a decent amount of capital without giving investors a veto right.

Only Adverse Changes to Articles and Bylaws. You don't want the preferred to be able to block any change the company might make to its bylaws or articles of incorporation, no matter how minor. So, ask that the protective provisions only require investor consent of adverse changes, not any changes.

Minimum Shares Outstanding. Many protective provisions will only apply if a certain percentage of the preferred shares are still outstanding. This means that if the majority of preferred shareholders convert to common stock-usually during a merger-the remaining investors (often a very small number) won't have the ability to continue blocking transactions. This helps prevent small investors from increasing their control over the company by holding out after the other shares convert.

Investor director approval provisions require the investors' board member or members to approve certain transactions by the board. These are usually transactions involving investing in other companies or lending money, entering into "interested transactions" - i.e., transactions between the company and its employees, officers or directors - hiring, firing or changing the salary of executives, and fundamentally changing the company's business or entering into major strategic partnerships. A few things to negotiate and watch out for:

Try to Eliminate the Provision. Not all term sheets have an investor director approval provision. The company can argue that the protective provisions and the board seat alone are enough, especially given the investor director's fiduciary obligations to the company (more in the Pro Tips).

Use Thresholds Wisely. Try to set reasonable thresholds on investments and loans the company can make, salaries of executives, and sizes of strategic partnerships that do not require investor director approval.

Reasonable Interested Transactions. For "interested transactions," try to negotiate a carve out for transactions that are reasonable and approved by the majority of the board in good faith. There is no reason that a company shouldn't do business with one of its executives or board members, as long as the transaction is fair to the company.

Limit the Line Items. If you see other terms included in the investor director provision, beyond those in the NVCA term sheet, these could raise a red flag. Unless there's a particularly good reason to include them based on the specific company, the founders should try to have them removed.

The investor director provision can give the investors a lot of control over the company, so the founders should try to limit it as much as possible, and make sure that the investor is not overreaching by trying to micromanage company transactions.