Harness Money

What is anti-dilution provision?

An anti-dilution provision is a contractual provision typically found in investment agreements or stock purchase agreements that aims to protect investors from dilution of their ownership stake in a company when new shares are issued in the future. It is commonly used in the context of equity financing, such as when a company raises additional capital by issuing new shares.

The purpose of an anti-dilution provision is to maintain the proportional ownership and economic rights of existing investors in the event that new shares are issued at a price lower than the price at which the existing investors initially invested. By adjusting the conversion or purchase price of their shares, the anti-dilution provision protects the investors from the negative impact of dilution.

There are different types of anti-dilution provisions, but two common forms are:

1. Full Ratchet: Under the full ratchet anti-dilution provision, if new shares are issued at a price lower than the conversion or purchase price of existing shares, the conversion or purchase price of the existing shares is adjusted downward to match the lower price. This results in a more favorable conversion or purchase price for the existing investors, effectively reducing the dilution.

2. Weighted Average: The weighted average anti-dilution provision takes into account the number of new shares issued and the price at which they are issued. It calculates a new conversion or purchase price for existing shares based on a formula that considers both the old and new share prices and the respective number of shares.

Anti-dilution provisions are designed to protect the economic interests of investors and ensure their ownership stakes are not unduly diluted. They provide a mechanism to adjust the conversion or purchase price of existing shares in response to new share issuances at lower prices.

It’s important to note that anti-dilution provisions are negotiable and their specific terms can vary. They are typically included in investment agreements to provide investors with certain protections and rights. Startups and companies seeking financing should carefully consider the impact of anti-dilution provisions on their ownership structure and future financing opportunities, and seek legal and financial advice to ensure they understand the terms and implications of such provisions.