The Veto List That Nearly Cost Two Founders Their Company

The situation

Chantal and Micheline built their business the way a lot of successful franchise operators do: slowly, then all at once. Chantal taught at a university and ran the numbers on weekends; Micheline worked as a software developer and handled staffing and supplier relationships in the evenings. Over six years they went from one location of a national fast-casual restaurant franchise to eight, all owned and operated through a single corporation, with combined annual revenue that had grown past $9 million.

Growth that fast needs cash. Franchise agreements typically require the operator to fund buildout, equipment and the first several months of a new location's losses before it turns a profit, and banks will only lend against a fraction of that. Chantal and Micheline had opened their first six locations on a mix of savings, retained earnings and a modest line of credit, but the ninth and tenth locations they had identified would require roughly $1.2 million more than the corporation had on hand.

A mutual contact introduced them to Dante, a private investor with a track record of backing multi-unit franchise operators. Dante offered to invest the full $1.2 million in exchange for a minority stake structured as preferred shares — shares that would sit ahead of Chantal and Micheline's common shares for dividends and on a sale, but that would not carry day-to-day voting control. On paper, it looked like exactly the kind of capital they needed, from someone who understood the business.

What the term sheet asked for

Dante's lawyer sent over a term sheet — a short, non-binding document setting out the proposed deal points ahead of a full shareholders' agreement — and Chantal and Micheline shook hands on the broad strokes before either of them had a lawyer of their own look at it. That is a common and understandable instinct. It is also where the risk started.

Buried in the term sheet was a list of matters that would require Dante's written consent before the corporation could act. Some of it was standard for a preferred-share investment: consent before issuing new shares, before taking on major new debt, before selling the company. A silent investor putting six figures into a business is entitled to protection against decisions that would dilute or devalue their stake, and Ontario corporate law gives shareholders wide latitude to agree to exactly that kind of protection in a shareholders' agreement.

But the list went much further. As drafted, it required Dante's consent before the corporation could open or close any location, sign or renew any lease, hire any employee above a modest salary threshold, change suppliers, or spend more than a small fixed amount outside the approved annual budget. Read literally, Chantal and Micheline would not have been able to hire a new store manager, switch a produce supplier, or sign a routine lease renewal without first getting a silent, part-time investor to sign off — someone who was not involved in day-to-day operations and had no obligation to respond quickly.

It is worth being clear about why this matters beyond inconvenience. Most national franchise agreements also require the franchisor's approval before a change in who controls decision-making at the operator level, and franchisors generally want a single accountable operator, not a company where routine calls can be blocked by an outside investor. A veto list this broad risked friction with the franchisor as well as with the two people actually running the stores.

What we did

1. Reviewed the term sheet against how the business actually ran. We asked Chantal and Micheline to walk through a typical month — hiring, supplier changes, lease renewals, marketing spend — and mapped each of those routine decisions against the proposed veto list. The exercise made the problem concrete: on paper, the founders would have needed sign-off for things they currently did weekly.
2. Separated genuine investor protections from operational control. We distinguished the consent rights that protect a minority investor's economic interest — new share issuances, major debt, a sale of the business, amendments to the shareholders' agreement itself — from the ones that functioned as day-to-day management control. Investor protection and management control are not the same thing, and a shareholders' agreement should reflect that distinction clearly.
3. Went back to Dante's lawyer with a narrower, better-justified list. Rather than rejecting the idea of a veto list outright, we proposed dollar thresholds for spending and debt that scaled with the size of the business, removed consent rights over hiring, supplier changes and routine lease renewals entirely, and added a requirement that any consent request be answered within a set number of business days so the business would not stall waiting on a response.
4. Added a carve-out for ordinary course of business. We built language into the shareholders' agreement confirming that decisions made in the ordinary course of operating the existing eight locations — the kind of decisions Chantal and Micheline made every week — did not require investor consent, full stop.
5. Flagged the franchisor approval issue in writing. We advised Chantal and Micheline to check their franchise agreement's change-of-control and management provisions before closing, and to give the franchisor notice of the new investor relationship rather than assume the original term sheet's veto structure would pass without comment.

The outcome

Negotiating the term sheet down to a workable shareholders' agreement took a little over five weeks — Dante's lawyer pushed back on several points before accepting the narrower list, and each round of comments added days. That delay was the real cost of the story.

While the terms were being negotiated, the landlord holding the site Chantal and Micheline wanted for their ninth location gave the space to a competing operator who could commit immediately. It was not a catastrophic loss — the corporation identified another site within a few months and eventually opened both new locations with Dante's capital behind them — but it was a real one. The founders had been counting on that particular location's foot traffic and lease terms, and losing it pushed their expansion timeline back by roughly half a year and meant accepting a somewhat less favourable lease on the replacement site.

The investment itself closed on the narrowed terms: consent rights over major decisions that genuinely protected Dante's stake, response deadlines that kept the business moving, and no veto over the routine calls Chantal and Micheline made every week. Two years on, the relationship has worked the way it was supposed to — Dante gets financial reporting and a say in major decisions, and the founders run the business without asking permission to hire a shift manager.

The harder lesson was about sequencing. Chantal and Micheline had already shaken hands on the broad strokes of the deal before bringing in a lawyer, which meant the negotiation started from a position where pulling back too hard risked souring the relationship with an investor they wanted and needed. A term sheet is meant to be reviewed and negotiated before anyone treats it as settled — treating the handshake as the deal, rather than the term sheet as a draft, is what turned a fixable drafting problem into a lost location.

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