Anti-Dilution Clause, Provision

A clause in an investment agreement designed to prevent an early round investor’s share of a company being diluted by later down-rounds of investment. Typically, an anti-dilution clause protects an early round investor from having the proportion of the interest in the company their shares represents as a function of the price paid for the shares reduced by the sale of later rounds at a lower subscription price per share (for example if the A round priced shares at $10, the anti-dilution provision would protect against a new round selling each share at $1).

A large number of mechanisms can be used to protect against dilution including for example, preference shares that the holder can convert to ordinary shares at a multiple of ordinary shares to each preference shares determined by an anti-dilution provision; and/or forward or reverse stock splits available to the protected party. Anti-dilution clauses are either “full ratchet” or “weighted full ratchet.”

  • “full ratchet” anti-dilution clause will allow an early round investor to increase the number of its shares to fully match the number of shares it would have received had it paid the later lower price.
  • A “weighted full ratchet” will limit the early round investor to receiving the new shares at the average weighted price of shares issued including the down-round (based on various formulae). The weighted average formula may be narrow based, i.e., using only the stock outstanding for the calculation, or broad-based, using all stock, convertible securities, warrants, and options for the calculation.

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