Skip to main content
Alehar - Corporate Finance Advisory

Anti-Dilution Provision

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.

Related Terms

Explore Glossary
01

Preferred Stock

Preferred stock is a class of ownership in a corporation that has a higher claim on assets and earnings than common stock. Preferred shareholders receive dividends before common shareholders and have priority in the event of liquidation, but they typically do not have voting rights.

02

Pro Rata Rights

Pro rata rights give an investor a contractual option to join a future financing to seek to maintain ownership; statutory pre-emption rights are separate and jurisdiction-dependent.

03

Cap Table

A Cap Table, or Capitalization Table, is a detailed spreadsheet or document that outlines the equity ownership, types of shares, and ownership percentages of a company. It includes information on founders, investors, and employees, as well as the dilution of shares over time through various funding rounds and option grants.

04

Valuation Cap

A valuation cap is a term used in convertible note financing that sets the maximum conversion price for the note, giving early investors the advantage of converting their investment into equity at a lower valuation if the company’s future valuation exceeds the cap. This mechanism protects early investors by ensuring they receive a favorable equity position relative to later investors.

Let's connect.

Tell us what you're working on. We'll tell you how we'd approach it. We respond within 24 hours.

Get in Touch

Sign up for our insights

Perspectives on corporate finance, fundraising, and M&A, from the Alehar team.