Anti-Dilution Provision
Alle termen
What is an anti-dilution provision?
Short answer: An anti-dilution provision protects an investor when a company issues new shares at a lower price than that investor paid.
Anti-dilution rights are common in preferred share financings. They do not stop dilution entirely. Instead, they adjust the conversion price or share economics so the protected investor receives more common-share equivalent value after a down round.
How anti-dilution works
- Full ratchet: Resets the investor's conversion price to the new lower issue price. This is the most investor-friendly version and can be very punitive for founders and common shareholders.
- Weighted average: Adjusts the conversion price using both the lower price and the size of the new issuance. This is more common because it reflects the economic weight of the financing.
Why it matters in a financing
The clause affects founder dilution, investor returns, cap table modelling, and negotiation leverage in a difficult financing. A company should model the impact before signing a term sheet, especially if it may need more capital later.
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