An anti-dilution provision is a clause commonly included in investment agreements to safeguard the ownership stake of existing shareholders. It provides protection against dilution in the event of a future financing round at a lower valuation. This provision ensures that existing shareholders maintain their proportional ownership in the company, even if new shares are issued at a lower price.
Q: How does an anti-dilution provision work?
A: When a future financing round occurs at a lower valuation, the anti-dilution provision kicks in. It adjusts the conversion price of existing shares, effectively reducing the impact of the lower valuation on the ownership stake of existing shareholders.
Q: Why is an anti-dilution provision important?
A: An anti-dilution provision is crucial for protecting the interests of existing shareholders. Without it, their ownership stake could be significantly diluted if new shares are issued at a lower price, potentially diminishing their influence and control over the company.
Q: Are there different types of anti-dilution provisions?
A: Yes, there are two main types of anti-dilution provisions: full ratchet and weighted average. Full ratchet provides the most protection to existing shareholders by adjusting the conversion price to the lowest price at which new shares are issued. Weighted average takes into account both the price and the number of new shares issued.
Q: Who benefits from an anti-dilution provision?
A: Existing shareholders, such as early investors or founders, benefit from an anti-dilution provision as it helps maintain their ownership percentage in the company. It ensures that their investment remains protected in the face of a lower valuation in future financing rounds.
Q: Can an anti-dilution provision be negotiated?
A: Yes, the terms of an anti-dilution provision can be negotiated between the parties involved in the investment agreement. The specific details, such as the type of anti-dilution provision and the extent of protection, can be customized to suit the needs and preferences of the shareholders.
Q: Is an anti-dilution provision always included in investment agreements?
A: No, the inclusion of an anti-dilution provision depends on the negotiations between the parties involved. Some investment agreements may not include this provision, while others may consider it essential for protecting the interests of existing shareholders.
Or want to know more about pre-seed funding?
