Glossary - Anti-Dilution Provision
An anti-dilution provision is a clause in an equity agreement that protects investors from equity dilution, resulting from later issues of stock at a lower price than the investors originally paid. These provisions adjust the price per share of the securities purchased by investors in light of down rounds, ensuring investors maintain a proportionate share of ownership in the company or suffer less dilution.
Also known as
- Dilution protection
- Anti-dilution clause
Use cases examples
- Series A Term Sheet: The anti-dilution provision here adjusts the conversion rate for the Series A preferred stock in the event of a down round to protect early investors, enacted through a weighted average formula.
- Shareholders' Agreement: This agreement includes a full ratchet anti-dilution clause ensuring that if any shares are issued at a price lower than the price paid by existing shareholders, then those shareholders will receive additional shares, thus maintaining their percentage of equity in the company.
Considerations for investors
- Investors should assess the type of anti-dilution protections offered, weighing the potential benefits of aggressive protections against the risk of displeasing founders or future investors.
- Consider the long-term impact on the company's capital structure and ensure that the provision aligns with anticipated future financings and growth strategy.
Considerations for founders
- Be aware that anti-dilution provisions can affect the company's flexibility in pricing future financing rounds. Aggressive anti-dilution terms may deter new investors.
- Understand the types of anti-dilution provisions (full ratchet, weighted average) and negotiate terms that are fair and sustainable for the company's growth trajectory.
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