Founders often assume that if they own a majority of their company’s voting power, they can sell their shares and exit on their own terms. In practice, especially in venture-backed startups, that is rarely how it plays out.

We recently advised on a situation that shows just how tricky these scenarios can become. Two founders received an offer to sell their shares to a third party. The deal would have effectively transferred control of the company to the buyer. While the terms were acceptable to the founders, they were unlikely to appeal to the company’s investors. That is where things got complicated.

In our case, the founders (let’s call them Alex and Dana) together held more than 50% of the company’s voting power. One might think that gives them the freedom to sell their shares outright, but they could not simply accept the offer and walk away. The reason lies in the company’s governing documents, which were drafted in line with standard NVCA provisions. These documents imposed a number of restrictions that made investor consent both a legal and practical necessity.

VC Roadblocks

Even without anything unusual in the documents, founders looking to sell their shares face a range of typical restrictions built into standard venture financing terms.

Voting Agreement

Section 3.3. of the NVCA Voting Agreement provides that no stockholder can participate in a stock sale that results in a change of control unless all preferred stockholders are allowed to participate and the money from the sale is divided as if the transaction were a Deemed Liquidation Event (meaning, allocated according to the liquidation preferences in the company’s Charter). In other words, the preferred stockholders either get their liquidation preferences paid out as if the company were being sold outright, or they agree (by waiver) to be treated differently.

ROFR/Co-Sale

Standard venture financing documents grant both the company and its investors rights of first refusal over any proposed share transfers. That means any proposed share sale must first be offered to the company, and then to existing investors. A direct sale to a third party can’t move forward unless these rights are formally waived, usually by both the board and the investors. Because founders often sit on the board, they are conflicted and cannot approve such waivers themselves.

Then there are co-sale rights, which entitle certain investors to participate in any sale by the founders. These rights may be limited to major investors, but even when the group is small, their participation can significantly affect the structure and economics of the deal. The founders can’t ignore these rights without risking a breach.

Bylaws

Company bylaws can introduce another hurdle by requiring board approval for any share transfer. Again, with the founders conflicted, approval must come from disinterested directors or, in some cases, a majority of disinterested stockholders, which often means the preferred shareholders.

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Vesting

Finally, vesting terms may limit what the founders can sell in the first place. If any of their shares are still unvested, the company typically retains repurchase rights. These rights must also be waived for the sale to proceed, and the waiver must come from someone without a conflict.

In This Case: A Charter Twist

What made Alex and Dana’s situation more complex was a specific clause in the company’s Charter, one not found in the default NVCA model but sometimes included in negotiated deals.

The Charter treated any sale of shares representing a majority of the company’s voting power as a Deemed Liquidation Event, unless waived by the Requisite Holders (a majority of the preferred). This meant:

· If the investors didn’t waive this treatment, the sale would trigger liquidation preferences, even though the investors weren’t direct parties to the sale.

· Under the protective provisions, the transaction could not proceed without investor approval, both for the Deemed Liquidation classification and for the transaction itself.

In effect, this gave the investors full control over whether the founders could exit, and on what terms.

How Did Parties Proceed?

For Alex and Dana, the answer was clear. Even though they technically owned more than half the company, they could not proceed without investor approval. Nearly every meaningful restriction, from treatment as a Deemed Liquidation Event to investor participation rights and board approvals, led back to the preferred shareholders.

That structure is intentional. These protections are standard in venture financings and are meant to prevent founders from making major decisions (such as selling control of the company) without investor involvement. Whether the founders are pursuing a full sale or simply trying to transfer shares, these restrictions apply and cannot be bypassed without proper waivers.