Anti-Dilution Provisions
Investor protections against the dilutive effect of issuing shares at a lower price than they paid.
Definition
Anti-dilution provisions protect investors from price dilution when a company issues shares at a lower price than previous rounds. These provisions adjust the conversion price of preferred shares to partially or fully protect against the economic impact of down rounds.
Types of Protection
- • Full Ratchet: Conversion price adjusts to new lower price
- • Weighted Average (Broad): Considers all shares outstanding
- • Weighted Average (Narrow): Only considers shares available for issuance
- • No Protection: No adjustment for down rounds
- • Usually only applies to down rounds
- • Can significantly dilute founders and employees
Real-World Example
Down Round Protection: VC invested at $2.00/share with weighted average anti-dilution
Company issues new shares at $1.00. The weighted average formula adjusts the VC's conversion price to $1.50, protecting against some dilution.