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Buachaill
Buachaill, Barrister
Category: Law
Satisfied Customers: 10528
Experience:  Barrister 17 years experience
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I've been invited to join a forthcoming startup company. I'd

Resolved Question:

I've been invited to join a forthcoming startup company. I'd be given 5% of the initial shares. I'm worried that over time my shares might easily prove worthless, as it seems to me that - there's one majority shareholder, who has 75% and total control,
and there's nothing in any Shareholder Agreement (or other doc) to stop him issuing any amount of new shares, at any time, to himself or anyone else, at any or no cost; - as I understand it, if at some future point the company went looking for investors, such
investors often only agree deals where the share / dividend / sale terms are wildly in their favour (and perhaps not entirely unfavourable to those directors who need to approve the deal), but that there's nothing to stop such deals from "shafting" other,
smaller shareholders. Are either of the two above concerns valid, and if so, is there any well-known, often-used remedy "in advance"?
Submitted: 1 year ago.
Category: Law
Expert:  Buachaill replied 1 year ago.
1. Dilution of an existing shareholding in a start up can occur, by either the issuing of shares by current insiders (such as the existing majority shareholder) or by the issuing of shares to new investors. However, to counteract this happening, you need either an undertaking that no further shares will be issued without your approval, or else a pre-emption right whereby your shareholding stays constant, unless you are given a right to invest upon the same terms, or better, than any subsequent shareholder. This second option gives the company the ability to attract further investors, but only if the overall company (and your share of the pie) is growing. This is the option which is likely to be favourable to the majority shareholder. The first option would essentially prevent the company growing by seeking further investment, whether from the majority shareholder or from outside investors. However, you need to realise that takings shares in a start-up is a risk. It is a risky investment taking shares in a new untried company. Along with this risk, that the company will never succeed, is the fact that protections for early stage investors against dilution are scant. It is an accepted feature of early stage company investment that subsequent dilution will happen. Absent further investment, the shareholding will diminish as a percentage of the company whilst hopefully, increasing in value as the overall pie grows.
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