Meaning
Restrictive covenants from early financing rounds that remain active after the company has achieved significant scale. Legacy consent clauses require the company to obtain specific investor permission for actions that would normally fall under board authority. These provisions were originally designed to protect small investments but become burdensome as the entity matures.
The obligation ends only when the underlying agreements are formally amended or superseded.
Operational Brake
Obsolete requirements for investor approval on small capital expenditures can slow down daily operations. Dealing with legacy consent clauses requires the legal department to track dozens of small agreements from the seed stage. This administrative burden grows as the company adds more departments and complexity.
Removal Logic
Negotiation of a new investment round provides the best opportunity to clean up the cap table. To eliminate legacy consent clauses, the company usually offers a trade off such as improved information rights or observer seats. This trade requires an understanding of what each historical investor values in the current market.
The cost is measured in the attention required to satisfy multiple stakeholders with diverging interests.
Governance Liberty
Modernization of the bylaws restores the board’s power to act. Operational flexibility returns once the company removes legacy consent clauses.
