Meaning
Contractual adjustment mechanism ensures ownership percentages align with final capitalization after secondary funding rounds or bridge financing. An equity true-up compensates investors or founders when prior estimates of valuation deviate from the actual price established by subsequent external capital injections.
Adjustment Protocol
Documentation outlines the conversion ratios required to bridge the gap between agreed interim valuations and the priced round. Parties calculate the shortfall by comparing current share counts against the modified ownership threshold. This calculation prevents dilution distortion caused by warrants or convertible notes that settle at a lower valuation than the latest investment.
Precise arithmetic determines the exact issuance of additional shares needed to maintain the intended post-money split.
Settlement Process
Legal counsel reviews the cap table once the subscription agreement concludes for the primary financing event. They apply the true-up provision if the closing price falls below the benchmark figure defined in the initial term sheet. This specific intervention acts as a retrospective rebalancing tool to correct capital structure imbalances without triggering a formal restatement of historical accounts.
Economic Consequence
Dilution impact shifts exclusively to the existing share classes that held a premium over the new issuance price. Founders suffer reduced control while early investors retain the economic position bargained for during the entry phase. Such mechanics protect the relative standing of participants against unexpected changes in market sentiment or valuation metrics between rounds.
