Pre-emptive Right

Explaination: The right of pre-emption for new issues of securities states that when a company issues new Equity Securities after the Closing Date then investors are given a pre-emptive right to subscribe to a number of shares calculated as per their proportion of shareholding

How it applies Startup/Investor and its impact: Investors always want to be a part of Start-ups that are doing really well. In order to avoid their dilution in the future rounds of investment, the Investors ask for Pre-emptive Right. This right to participate in the subsequent rounds allows them to maintain their stake in the future rounds in the Start-ups by subscribing their shares on pro-rata basis and on the same terms as that of the incoming investors. This solves the problem for Start-ups and Founders as well as they receive funds which gets their business going.

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