Here’s Everything You Need To Know About Anti-Dilution Protection

What Is Anti-Dilution Protection?

Anti-dilution protection is like a safety net for investors. It is often included in investment agreements, especially in venture capital financing, to protect the rights of earlier investors in a company when new shares are issued at a lower price than the previous investment round.

It aims to prevent the dilution of the ownership stake and economic interests of existing investors in case of a down round.

The following are some of the examples of anti-dilution provisions:

• Full Ratchet Anti-Dilution: If new shares are issued at a lower price than what an early investor paid, the investor’s shares are adjusted downward to match the new lower price.
• Weighted Average Anti-Dilution: This method takes into account the number of new shares issued and the price at which they are issued, resulting in a less severe adjustment to the investor’s shares compared to the full ratchet.
• Broad-Based Anti-Dilution: It’s a more investor-friendly method that considers not only common stock but also convertible securities like stock options and warrants in the anti-dilution calculation, providing better protection to investors.

How Do You Protect Against Dilution Of Shares?

To protect against dilution of shares, you can:

• Invest in securities with anti-dilution provisions like preferred stock or convertible notes.
• Negotiate for stronger anti-dilution terms in your investment agreement.

What Does Anti-Dilution Protection Mean For Minority Shareholders? 

Anti-dilution protection ensures that any investor, regardless of their ownership percentage, is protected from losing value in their shares when the company issues additional shares at a lower price.

This protection maintains fairness and transparency in the ownership structure, benefiting all shareholders, not just the majority.

How Anti-Dilution Is Different From Preemptive Rights?

Anti-dilution and preemptive rights are both methods to protect existing shareholders from losing ownership when a company issues new shares. The key difference is in how they achieve this:

Anti-Dilution

• Protect existing shareholders’ ownership when new shares are issued at a lower price.
• Adjusts share price or the number of shares held by existing shareholders after new shares are issued.
• Full Ratchet and Weighted Average Anti-Dilution.
• Common in convertible securities such as preferred stock.

Preemptive Rights

• Allow existing shareholders to buy additional shares before others, maintaining ownership.
• Grants existing shareholders the right to purchase more shares before they are offered to others.
• Commonly referred to as Preemptive Rights.
• Often found in company bylaws or shareholder agreements.