Preemptive Rights
The right to buy new shares before outsiders to prevent dilution, similar to pro rata rights.
Definition
Preemptive rights give existing shareholders the right to purchase newly issued shares before they are offered to outside investors, allowing them to maintain their ownership percentage. While functionally similar to pro rata rights, preemptive rights are often broader and may apply to any share issuance (not just priced rounds). They are more common in European and non-US jurisdictions.
Why it matters
Preemptive rights ensure investors can prevent dilution by participating in new issuances. For employees, these rights do not typically apply, but they affect how new shares are allocated and can limit the amount available for new investors in a round.
Example
An investor with preemptive rights owns 10% of the company. When the company issues 1M new shares, the investor has the right to purchase 100,000 shares (10%) at the offering price before any outside party can participate.