Hyderabad | 25 Jan, 2018 (2 years ago)

Startup Funding and Finances

Question on startup share dilution.

Assume a startup has 2 founders with 50% shares for each, they are being funded by an investor who asking 30% of the company. Can the company issue new shares where only one founder will dilute and other founder remains undiluted i.e., founder-1 50%, founder -2 20%, investor - 30% Please give a detailed explanation on whether we have to dilute equally for both the founders or we can dilute more from a single founder without affecting the other founder
Answers
28 Jan, 2018 | 17:40

Hi,
This is an interesting, though not necessarily a common proposition. Generally, the dilution occurs equally, i.e., both the founders undergo dilution equally. However, dilution is purely a matter of contract and nothing prevents one founder from diluting his shareholding or having the other founder dilute his shareholding. Conceptually, if the shares are being transferred from the founder to the investor, then this is a process of share transfer, as opposed to a share issuance by the Company where, by default, the dilution will be equal. Even then, one founder may be granted such additional shares during the process of share issuance, so as to arrive at the intended shareholding structure that you mentioned. However, you should take care of appropriate documentations such as the investment agreement, term sheet, founder's agreement, share transfer agreement, etc. in order to achieve your desired result.
Please feel free to contact me over LinkedIn for a detailed discussion if required.


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