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In a market where it seems like anyone who sprinkles the magical AI fairy dust on their start-up immediately attracts a swarm of VC interest, it isn’t surprising that founders of promising AI start-ups have a lot of leverage with potential VC investors.  This Goodwin memo says they aren’t afraid of using it when it comes to negotiating the economic and governance terms of these investments.

The memo notes that while there’s nothing new here, founders are seeking favorable terms in earlier rounds than in the past, and they’re also not content to settle for concessions on just one or two points. This excerpt discusses some of the governance terms that founders are negotiating for:

The core objective for founders in venture financing is to maintain operational control — over the CEO role, board composition, and overall voting. The governance mechanisms they use to maintain that control vary by deal, but the most commonly negotiated provisions include:

– Board composition and voting rights: founder-majority or founder-designated board configurations that give founders effective control over the board’s decisions, whether through a majority of seats or super-voting rights attached to founder-held seats. These protections don’t require continued service, so they survive a founder’s transition out of an operating role.

– Super-voting structures: typically, 10 votes per share on founder-held common stock, allowing founders to exert structural vetoes through voting power alongside any explicit protective provisions.

– Common stock protective provisions: founder veto rights — exercised as a stockholder rather than as a board member, which reduces fiduciary duty concerns — over M&A, future financings, material changes in company direction, executive hiring and firing, and other key governance controls. These provisions are often negotiated to be narrower in scope than what investors would typically receive as standard preferred stock protections, but their mere existence as common stock veto rights is atypical when viewed in historical context.

– Limits on investor protective provisions: the converse of the common stock protective provisions, investor protections are often scaled back or limited by explicit economic thresholds — for example, limiting the veto on an exit transaction to situations in which a transaction would return less than a defined multiple of invested capital, effectively removing the investor check on exits that generate meaningful returns.

Economic terms sought by founders include terms providing them with structured secondary liquidity opportunities, participation in investor secondaries, and multiple-round structures with valuation step-ups for a subsequent tranche baked into the initial deal documents.

– John Jenkins