Equity True-Up Clause

Adjustment Trigger

Specific events defined in the shareholder agreement activate the recalculation of the capitalization table. An equity true-up clause might be tied to the achievement of a revenue target or the grant of a patent. Upon reaching the trigger, the company issues new shares or transfers existing ones between the parties.

This avoids the need for complex upfront negotiations when future value is uncertain.

Dilution Protection

Investors use these terms to protect their economic interest against the issuance of shares at a lower valuation in subsequent rounds. When the equity true-up clause operates as an anti-dilution measure, it compensates the earlier investor for the loss in value. This can take the form of bonus shares or a price adjustment.

It maintains the relative power balance between founders and late-stage financiers.

Valuation Timing

Setting the window for the adjustment is a critical part of the negotiation process between founders and investors. The equity true-up clause usually operates within a fixed period of one to three years after the initial investment. After this period, the ownership stakes are typically frozen unless new capital is raised.

The use of an independent auditor to verify the final figures prevents disputes between the parties.