Reserve matter rights
Explaination: Reserved Matters are the matters that require the prior consent of the Investors before the decision is taken over the same.
Term Sheet lists down Reserved Matters in the Schedule.
The procedure for listing any such matters in the Board requires first taking prior approval from the Investor which holds the Reserved Matter right and then ensuring compliance with any quorum rights.
How it applies to Startup/Investor and its imoact: An Investor generally invests not just in the Startup or the product but also on the Founder. Therefore, an Investor would want to allow the Founder to run the Startup on the Founder’s judgment.
However, an Investor would want to ensure that no such transactions take place in the business that is out of ordinary course of business or such transactions which may allow the Founder to misuse their control over the Startup to embezzle the funds of the Investors. Accordingly, reserved matters provide a veto to the Investor to ensure the Startup continues on the same journey that was promised to the Investors and that no major deviation takes place.
Note for the Startups – Each Startup should ensure that it does not include such items in the Resereved Matter which could slow down the business responsiveness of the Startup or might create unecessary hurdles for the Startup to carry out normal business operations.
Note for Investors – An investor should ensure that such corporate actions which might affect futture investments or dilution of the Investors are appropriately coveredd in the Reserved Matters