A shareholder loan is usually a form of debt financing provided by shareholders. These are usually the most subordinated debts issued by a company. As it is subordinated to other priority loans, other «old» creditors therefore have priority rights to repay the company`s debts. Shareholder loans can also have long durations with small or deferred interest payments. Shareholder loans can also be converted into [a class] of shares. This form of financing is typical of start-ups that are unable to raise debt from banks. Under weighted average dilution rate, the conversation rate is a weighted average of the issue price before and the new issue price. In this case, the SHA should include a formula for calculating the weighted average share price on the basis of the 1) amount obtained by the company before the additional fundraising cycle and 2) the average price per share relative to the subsequent capital increase and the lower share price. A weighted average formula does not protect investors from dilutions to the same extent as the crater, but it will mitigate its effect. A SHA will generally indicate the number of original board members (and often their names and other details) and sometimes the rights of some shareholders to appoint a certain number of board members. Other shareholders, without the right to appoint directors, must vote in accordance with the company`s by-law. The founders of a company generally do not contain complex anti-dilution rules in an initial SHA (except pre-emption rights). These terms are generally negotiated, or even dictated, by outside investors and depend on the relative bargaining power of the parties.
They are not used to protect founders, but to protect experienced investors. Anti-dilution provisions are one of the many incentives that are often needed to satisfy investors and reduce their risk when investing their money in a company that needs capital. All businesses have financing needs and sometimes working capital and cash flow are not enough to meet their needs or growth needs. A SHA should indicate the methods of seeking additional capital and the priority in which such funding should be sought. These additional resources are often obtained through external financing, including mezzanine financing (convertible debt securities sometimes with a sweetener such as warrants), external investors and traditional loans from banks or other financial institutions; Shareholder loans And cash calls.