Preemptive Rights
Preemptive Rights, akin to the rights of first refusal, grant shareholders the privilege to acquire new shares of a company before external parties. Often termed "Right to Participate Pro Rata in Future Rounds," it's a standard provision in term sheets.
What it Means:
Preemptive Rights empower existing shareholders by allowing them to maintain their ownership percentage through the purchase of additional shares before external investors are offered the opportunity.
How to Calculate:
Calculate the preemptive purchase by determining the pro rata share of the new shares available for acquisition. If a shareholder holds a 10% stake and the company issues 1,000 new shares, the shareholder can purchase 100 shares (10% of 1,000).
Why Measure:
Measuring Preemptive Rights is vital for founders as it safeguards existing shareholders' interests, prevents dilution, and fosters a sense of control. It ensures fairness and inclusivity in future funding rounds.
Examples:
Imagine an Indian startup issuing 1,00,000 new shares at INR 100 each. With preemptive rights, an existing shareholder with a 5% stake can secure 5,000 shares at the initial price, preserving their ownership stake.
Understanding Preemptive Rights is instrumental for Indian founders navigating funding dynamics. It preserves equity, fosters investor trust, and promotes a balanced approach in the ever-evolving startup landscape.