Corporate and investment clauses

Selling and issuing shares

Pre-emptive rights give existing shareholders the first chance to take up new shares, so their percentage is not diluted without their agreement. Right of first refusal gives them the first chance to buy shares an existing holder wants to sell. Drag along lets a majority force minority holders to join a sale on the same terms, which buyers usually insist on, and tag along lets a minority join a sale the majority has arranged, so they are not left behind with a new controlling owner. Read drag along and tag along together, because the thresholds in one are normally negotiated against the other.

Protecting investors and founders

Anti dilution protects an investor if the company later raises money at a lower price, and the formula chosen, broad based weighted average or full ratchet, changes the outcome sharply. Vesting releases a founder's or employee's shares over time, so someone who leaves early does not keep a full stake. Good leaver and bad leaver sets the price at which a departing holder's shares are bought back, depending on why they left. Information rights give investors regular financial reports and access to records. These four are where early stage terms differ most between term sheets.

When shareholders disagree or leave

Deadlock sets what happens when equal shareholders or directors cannot agree, from escalation and mediation to a buy sell mechanism that forces one side out. Exit covers how and when investors expect to realise their investment, whether by sale, listing or buyback, and what each party must do to support it. Founders should read deadlock before signing a fifty fifty arrangement, because without it the only way out of a stalemate may be winding up the company. Each page carries sample wording, variants and negotiation points, and none of it is legal advice.

Every page in this collection

• Anti dilution clause: protecting an investor's price in a down round

  A down round already hurts founders, and the anti dilution formula decides how much more of the company moves from them to earlier investors. The gap between the two formulas can run to hundreds of thousands of shares, so this is a clause where the arithmetic matters more than the wording.

• Deadlock clause: breaking a tie in a 50 50 company

  Equal ownership feels fair on day one and becomes a trap the first time the owners disagree about something that matters. A deadlock clause decides in advance whether the tie is broken by talking, by a third party, or by one owner buying the other out.

• Drag along clause: making minority shareholders join a sale

  Most buyers of a private company want 100 per cent of the shares, so one holdout with a few per cent can block a deal everyone else wants. The drag along clause removes that veto, which is why minority holders focus their attention on the protections attached to it.

• Exit clause in a shareholders agreement: planning the sale or listing

  Investors buy into a private company planning to sell one day, while founders may be happy running it indefinitely, and that difference is best surfaced before the money goes in. The exit clause turns an unspoken expectation into a process with dates, an adviser and consequences.

• Good leaver bad leaver clause: pricing a departing founder's shares

  Founders leave for every reason from illness to misconduct, and shares held by someone who fell ill should not be treated like shares held by someone who walked out to join a competitor. The classification is what gets fought over, because it can move the value of a stake by millions.

• Information rights clause: what investors are told and when

  Minority investors in a private company have very limited statutory access to its books, so what they see in practice is whatever the agreement promises. For founders, the clause sets a reporting workload that has to be realistic for a small finance team.

• Pre emptive rights clause: first right to buy new shares

  Every new share issued to someone else shrinks each existing holder's percentage, so this clause is the main defence against being diluted without a say. It also shapes how quickly a company can raise money, which is why investors and founders negotiate its exceptions as hard as the right itself.

• Right of first refusal clause: matching an outside offer for shares

  Private company owners care who they end up in business with, and this clause is the usual way they keep control over it. It also affects the price a seller can get, because an outside buyer knows its offer may simply be matched.

• Tag along clause: letting minority shareholders join a sale

  Without a tag right, a founder can sell control of a company at a premium and leave the minority holding shares in a business now run by a stranger. The clause makes sure any premium for control is shared, and that nobody is left behind when the people who built the company move on.

• Vesting clause: earning founder shares over time

  Equity handed out on day one assumes everyone will stay, and without vesting the co founder who leaves in month four keeps half the company. Vesting ties ownership to contribution, which is also why investors expect to see it before they put money in.