Negative Covenants . . .

refer to operating covenants which prohibit a company from taking specified actions without the consent of the investor. They are a regular part of venture financings and are designed to protect the investor from future events that may dilute or undermine the value of his investment. Since they also limit management’s flexibility, negative covenants should be negotiated carefully. They usually appear as part of the financing agreement or in the terms of an investor's convertible preferred stock.

Negative covenants typically prohibit a company from taking one or more of the following types of actions without investor consent:

• Altering the company’s charter or bylaws.
  

• Changing the character of the business conducted by the company.
  

• Paying dividends, issuing new stock, or borrowing funds that are convertible into stock.
  

• Altering the preferences of the stock acquired by the investor.
  

• Disposing of company assets or acquiring new assets in transactions that fall outside the ordinary course of the company’s business.
  

• Voluntarily dissolving or winding up the company.
  

• Entering into business transactions with management of the company.

See: Affirmative Covenants, Management Agreements, Operating Covenants, Reps & Warranties, Structure.