How can the co-founders equity (economic and control) be protected by being diluted in excess?


1

How can the co-founders that hold a minority of the shares be protected against:

  • A dilution of his equity (economic and control) triggered by the shareholders that hold a majority of the shares?
  • A dilution of his equity due to an agreement of non-diluting equity with a shareholder?
  • A dilution of his control by the means of M&A by other company owned by the shareholders that hold a majority of the shares?

Equity Legal Dilution

asked Apr 2 '12 at 07:27
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Jj.
29 points
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1 Answer


2

The way to protect minority (or any) stockholders against dilution is with a written non-dilution agreement.

Basically such an agreement could state:

1) Existing stockholders have a right of first refusal to purchase any additional shares being offered by the company.

or

2) A prohibition on the issuance of new shares without the prior consent of a super majority (2/3, 3/4 or whatever) of the existing shareholders.

You should be aware that such an agreement, while serving your desires, may or may not be good for the company. In general they are frowned upon.

Wikipedia has a nice article on stock dilution, which can take many forms.

Here is a more in depth article: A primer on anti-dilution provisions written by a lawyer.

Here is a sample agreement.

And a discussion on Quora See also this answer Can non-dilutable stock (or equivalent) be issued?

answered Apr 2 '12 at 08:00
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Jonny Boats
4,848 points
  • Thanks, but this kind of agreement is what I'd like to avoid, for any shareholder. – Jj. 9 years ago
  • @JJ - then I am confused. If you're not looking to protect against dilution then what is the question? – Jonny Boats 9 years ago
  • Now I read again your answer and I see that the item 2 above is a good suggestion. My previous comment was under the assumption that the non-dilution agreement would block, perpetually, the dilution of the shares. – Jj. 9 years ago
  • One of the protections I had in mind is a clause forbiding non-dilution agreements. – Jj. 9 years ago
  • @JJ you don't need a clause prohibiting non-dilution agreements. If you don't want them then just don't have one. – Jonny Boats 9 years ago

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Equity Legal Dilution