we have to be honest with you. The whole “New Year, new me” phrase doesn’t really apply to us. We value consistency - and that’s why we’re back with our newsletter devoted to explaining key legal terms to startup enthusiasts.
Today, we’re launching a new miniseries on investor rights in the context of negotiating a term sheet - starting with pre-emptive right.
What’s a pre-emptive right?
Simply put, shareholders with a pre-emptive right can buy new company stock before it’s offered to others. Why? To protect these shareholders against dilution in both share value and voting power in the company.
Why does this matter?
Pre-emptive right protects current shareholders against dilution of their ownership. When the company issues shares to new investors, current shareholders’ ownership decreases due to dilution. Pre-emptive right lets shareholders maintain their ownership percentage by enabling them to buy new stock before it gets offered to others.
Pre-emptive right usually applies to the extent of current ownership (pro rata). So, for instance, if a shareholder owns 5 % of the company, the pre-emptive right would allow them to buy up to 5 % of new shares.
It’s usually used as an incentive for early investors in return for the risk they undertake by investing in a brand new venture.
Dos and don'ts
Navigating the pre-emptive right can be tricky, but we’ve got some simple tips to help you.
In a nutshell
Granting pre-emptive rights can be a win-win. It can stimulate capital inflow to early-stage companies while enabling investors to keep a stable ownership percentage over time.
If you want to chat more about maintaining a healthy balance between company needs and investor interests, reach out to our team anytime and follow us on LinkedIn for more insights.
What's a pre-emptive right? Why does this matter? Do's and don'ts In a nutshell
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