- May 6, 2020
- Knowledge Repository
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Fall Away Right
Explaination: Fall Away Right as the name suggests falling away of the rights of the parties in case their shareholding or stake falls below a certain threshold.
How it applies to Startup/Investor and its impact: Fall away right is generally event based and connected with the shareholding of the Parties. For Example: It is seen in the term-sheet that if investor is diluted below 5% then their right to appoint director on the Board of the Start-up will fall away or their right of Information will fall away.
Founder’s generally negotiate for Fall away right as it becomes easier for them to focus on the business of the Start-ups. If there is no fall-away right then even an Investors having minimum stake say 2% shall have all the rights as that of major investors having say 10% stake and then it becomes difficult for them to operate their business as their decision making power is hampered. Therefore, it is ideal to negotiate for fall-away rights from the first investment itself because the rights negotiated in the first investment round becomes a precedent for later rounds of investment with little tweakings in the language of the right or addition of some other minor rights.