An anti-dilution provision is a clause typically found in investment agreements that protects existing investors from the dilution of their ownership percentage. This occurs when a company issues additional shares, which can reduce the value of previous investors’ stakes.
This provision is particularly relevant during fundraising events, such as when a startup raises capital by issuing new equity. If new shares are sold at a lower price per share than the previous investment, the value of the original shares is effectively decreased. Anti-dilution provisions help mitigate this issue by allowing existing investors to adjust their ownership stake or the conversion price of their shares to maintain their percentage of ownership or to protect against a decline in value.
There are two main types of anti-dilution provisions: full-ratchet and weighted-average. Full-ratchet provisions allow existing investors to convert their shares at the lowest price paid during subsequent equity rounds, while weighted-average provisions offer a more gradual adjustment based on a formula considering old and new shares. These protections are crucial for investors as they help ensure their investments retain value over time.
