SINGAPORE Law and Practice Contributed by: David He, Benjamin Teo, Kinnari Sahita and Binh Vong, Gunderson Dettmer Singapore LLP
round investors that the company will have suf - ficient hiring runway for a reasonable period. In early-stage companies this may simply be until the next expected fundraise (eg, the company’s expected cash runway) while in later-stage com - panies the amount is usually expected to sup - port a 9- to 12-month hiring runway, after which such investors will be expected to share in the dilution of any additional ESOP increases. In earlier rounds, start-ups may be expected to allocate a greater percentage towards the available and unissued ESOP, as such start-ups generally cannot offer lucrative cash compensa - tion packages to employees and rely heavily on equity compensation to subsidise, resulting in accelerated depletion of the available ESOP. If a start-up has promised, but has not yet formally issued, a certain number of shares out of its ESOP, it will typically be expected to account for such promised equity as issued and outstanding for the purposes of determining the unallocated and available ESOP. 6. Exits 6.1 Investor Exit Rights Exit Rights Common exit-related provisions include: • registration rights in connection with a public offering or follow-on offering; “change of con- trol” tag-along rights; • drag-along rights; • redemption rights; and • undertakings to use “reasonable” or “best” efforts to enable an investor exit within an agreed period of time. Registration rights provide certain investors with the right to force a company to undertake
a registration process with the relevant securi - ties regulators, to register their shares for sale to the public. Tag-along rights allow investors to co-sell a proportion of their shares alongside sales by founders and, potentially, other shareholders. Investors typically negotiate for “change of control” tag-along, whereby they are entitled to sell their entire stake in the company should a sale by founders or other shareholders result in a change of control of the company’s voting power. The intention is to ensure that investors who invested in a start-up governed by collec - tive control among minority shareholders should not be “stranded” if the start-up becomes major - ity owned by a single shareholder. Drag-along rights empower the board and share - holders to compel the sale of all or a significant majority of the company’s share capital to a third party. Investors may occasionally seek the ability to unilaterally initiate a drag sale after a set num - ber of years. However, enforcing this provision can be challenging in practice, as it is unlikely a company will execute a successful sale process without the support of management and/or other major investors. Redemption or buyback rights provide an inves - tor with the right to put their shares to the com - pany after a number of years. The enforceability of such provisions is dependent on the com - pany’s solvency and other statutory limitations. Such rights are uncommon, and early-stage investors seeking such rights should be mindful that later investors will almost always negotiate for similar rights on par with, or senior to, their rights of redemption, which may have a coun - terproductive effect.
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