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Saksham
•
Bebyond • 2m
Transfer Rights Clauses in SHAs from an Investor’s Perspective!! When investing in startups, a well-drafted Shareholders Agreement (SHA) isn’t just a formality, it’s the foundation that protects their financial interests and ensures strategic control. Among the critical provisions, TRANSFER RIGHTS CLAUSES deserve special attention as they determine HOW, WHEN, AND TO WHOM shares can be transferred. Key Transfer Rights Every Investor Looks For: 1. Right of First Refusal (ROFR) - If a shareholder wants to sell their shares, existing investors get the first opportunity to buy them before they are offered to an external party. This prevents dilution and keeps control within the circle of trusted investors. 2. Tag-Along Rights - If majority shareholders decide to sell their shares to a third party, minority investors have the right to "tag along" and sell their stake under the same terms. This ensures they aren’t left behind when major exits happen. 3. Drag-Along Rights - If a majority of shareholders want to sell the company, they can “drag along” minority investors to join the sale. It’s a powerful tool for strategic exits but can be risky if the terms aren’t favourable for smaller investors. 4. Lock-In Periods - Sets a minimum period during which shares cannot be transferred. This is crucial for early-stage investments where stability is needed to drive growth. 5. Put and Call Options - Put Option: Gives them the right to sell their shares back to the company or promoters. - Call Option: Allows them to buy additional shares under predetermined conditions. These are particularly useful for securing favourable exits or increasing their stake. Potential Issues Investor's Watch Out For: 1. Ambiguous Trigger Events - Ensure that the circumstances under which transfer rights are activated are CLEARLY DEFINED. Vague clauses can lead to disputes or loss of control during crucial decisions. 2. Unfavorable Exit Terms - Drag-along and tag-along rights must be scrutinized to prevent being forced into a low-value exit. Always NEGOTIATE for fair valuation mechanisms! 3. Dilution of Control - Inadequate ROFR or lock-in clauses may allow new entrants, potentially diluting your stake or shifting the company’s control dynamics.
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