Drafting Reserved Matter Schedules for Venture Capital Shareholders
Effective venture capital reserved matter schedules require clear voting thresholds, cascading subsidiary covenants, and fallaway provisions to prevent deadlock.
Fallaway Thresholds
Meaning
The precise ownership percentage at which specific investor privileges or governance rights cease to exist defines a major transition point in a company’s lifecycle. These fallaway thresholds ensure that control remains proportional to the economic stake held by each party. Once an investor drops below the mark, their right to appoint a director or veto certain decisions disappears.
Equity Trigger
Measuring the current holding against the total issued share capital determines the status of the investor. When fallaway thresholds are crossed, the legal department updates the shareholder register to remove the special designations. This process happens automatically unless the agreement specifies a grace period for the investor to buy more shares.
Governance Sunset
Board seats are often the first rights to be removed when ownership declines. The fallaway thresholds prevent a former major investor from influencing company policy after they have sold most of their position. This transition allows the company to refresh its board with representatives from newer or larger stakeholders.
Board Seat
Retention of a director position depends on staying above the agreed level of capital. If the fallaway thresholds are set at ten percent and an investor sells half of their twenty percent stake, the right to nominate a board member is lost. The affected director must resign immediately upon the completion of the share sale.
This rule prevents a crowded board of directors as the company scales.