Definition
Anti-Dilution Provision
An anti-dilution provision protects investors from dilution if the company later raises money at a lower price than they paid.
If a down round occurs, anti-dilution adjusts the conversion price of the earlier investor's preferred shares so they receive additional shares to compensate. 'Full ratchet' resets to the new lower price (harshest for founders); the more common 'weighted average' adjusts based on the size and price of the new issue.
Anti-dilution is a standard term-sheet clause that mainly bites founders and unprotected holders in a down round. Indian deals typically use broad-based weighted-average anti-dilution as the market norm.
Related terms
- Down RoundA down round is a funding round in which a startup raises money at a lower valuation than its previous round.
- Term SheetA term sheet is the non-binding document that sets out the key terms of a proposed startup investment before definitive agreements are drafted.
- Liquidation PreferenceA liquidation preference gives preferred investors the right to get their money back (or a multiple of it) before common shareholders in an exit or wind-up.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.