When a majority shareholder attempts to sell its stake in a company, the right granted under a Tag Along provision gives minority shareholders the opportunity to join the transaction. Anti-dilution clauses are included in the shareholders` agreement to protect an investor from dilution of equity resulting from subsequent issues of shares at a lower price than the investor initially paid (a “downsing cycle”). Such provisions are essential to maintain control over the management of the company while giving large shareholders additional control over decisions that influence the direction of the company. Dilution protection is a term that is present in almost all installation transactions. From the point of view of the founders, especially in the case of a start-up or an early-stage company, it is very important to understand the implications of such a provision in the shareholder agreement (SHA). Founders generally tend to accept so-called “standard” terms in the SHA when they have an urgent need for investment. An anti-dilution provision should be carefully reviewed to ensure that it is not too harsh for the founders and that the transaction documents set precedents for the subsequent investment cycle. This article discusses some of the main methods of dilution protection typically found in transactions in India and some of the challenges associated with the effective implementation of these anti-dilution provisions. There are two main types of anti-dilution provisions that allow investors to protect themselves against the dilutive effects of future share issuances. Of these, another possible anti-dilution formula is the large-scale weighted average adjustment, the purpose of which is to reduce the old conversion price to a number between itself and the price per share in dilutive financing, taking into account the number of new shares issued. In summary, when acquiring additional capital, the first shareholders should consider the impact that an anti-dilution clause may have on their business. As has already been said, a pay-to-play clause can yield better results.
“Standard investment clauses usually last four years and have a one-year `cliff`. This means that if you had 50% equity and you leave after two years, you only keep 25%. The longer you stay, the higher the percentage of your equity until you are totally unwavering in the 48th month (four years). Every month you actively work full-time in your company, 1/48 of your equity package becomes unwavering. However, since you have a one-year pitfall, if one of the founders leaves the company before the 12th month, he or she doesn`t leave with anything; while they remain until day 366, it means that you will immediately receive a quarter of your shares unwaveringly.”  In India, the implementation of dilution protection is complex given existing legislation. . . .