Anti-Dilution Protection
Also called: Anti-Dilution Clause · Down Round Protection · Ratchet
Anti-dilution protection adjusts an investor’s shareholding if the company later issues shares at a lower price than they paid. It compensates the earlier investor for the reduced value of their entry price, usually by issuing them additional shares at no extra cost.
In more detail
The two main mechanisms differ sharply in severity. A full ratchet re-prices the earlier investment as though it had been made at the new, lower price — the most aggressive form. A weighted-average adjustment accounts for how many shares were issued at the lower price, and is the more common market standard.
The cost of anti-dilution protection is borne by everyone without it — typically founders and employees — so an aggressive ratchet in an early round can create serious cap-table damage if a later round prices down.
Anti-dilution is distinct from pre-emption rights, which let existing shareholders buy into new issuances to maintain their percentage. The two are often confused but solve different problems.
What our lawyers check
- Whether the mechanism is full ratchet or weighted average
- Which issuances are carved out — option pools and conversions usually should be
- The modelled dilution impact on founders in a realistic down-round scenario
- How it interacts with pre-emption rights and any pay-to-play provision
Contracts where this clause matters
Related terms
This definition is general information about commercial contracting practice, not legal advice. How a clause operates depends on the specific wording of your agreement and the law that governs it. For advice on your contract, have it reviewed by a lawyer.
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