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What is Pre-Emption Right? Founder’s view point

What does Pre-Emption right mean?

Pre-emption rights mean a preferential right to subscribe to shares of the company whenever such shares are offered to someone else.

What does Pre-Emption right stipulate?

Under this clause, the investor would specify that whenever the company proposes to raise fresh funds from external parties or other investors, the company shall be mandated to make an offer to the investor for subscribing to additional shares in the company, such that, the stake held by the investor does not dilute.

Pre-emption rights would also state that the terms of offer to the investor should not be in any way less favourable than what is being offered to the new investors.

Pre-emption rights are mandatory for the company but optional for the investor. Which means that the company has to make an offer, but the investor may choose not to invest in the funding round.

Through this right, the investor tends to protect the possible dilution of his stake in the company due to fresh funding rounds and seeks an equal opportunity to invest in order to retain the stake.

This post is part of our Founder’s handbook – “Negotiating Shareholder’s Agreement”, a comprehensive handbook for founders to negotiate shareholder’s agreement. Click here to download the complete handbook.

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