2. Anti-Dilution Provisions

2.4. Conclusions

This chapter has discussed anti-dilution provisions, a simple yet powerful instrument for investors to protect their valuation. The logic of these provisions is very simple. If new securities are issued at more favorable terms, the conversion price of the original (preferred) securities is automatically lowered. Depending on whether or not the anti-dilution provision takes into consideration the size of the down round when adjusting the conversion price, we distinguish between:

  • Full ratchet anti-dilution provision
  • Weighted average anti-dilution provision.

 

Especially in ventures that face a lot of uncertainty, such provisions should also make it easier for investors and entrepreneurs to agree on a deal valuation. With anti-dilution provisions in place, the investors will be able to adjust their terms if the future proves that the original assessment of the firm was overly optimistic.