Anti-Dilution Clauses are safe guard provisions that may be invoked by startup founders as well
as investors to secure their interests.
An effective Anti-Dilution policy reflects a potentially successful startup and investors are more
committed when key considerations like this are in place.
There are two notable types of anti dilution clauses and we would be looking at them shortly.
Types of Anti dilution clauses
Full ratchet
Weighted average
Full ratchet dilution clause is mostly suitable for holders of convertible securities and preferred
shareholdings. Here, in the event of a decline in company’s shares, the shareholder is still
protected. Thus, the shareholder is afforded the leeway to convert shares purchased at the
original share value and purchase new shares at the declined value. In other words, there is no
dilution in respect of shareholdings for the particular shareholder as he is able to still recoup the
exact value of shares regardless of the dilution.
Weighted average anti dilution clauses employs the usage of a formula considering the shares
held by the original investor and the new total outstanding shares. Here, the new conversion
price under the weighted average is determined and so, owners of shares would be availed the
option to convert at the new price.
Both anti dilution options present avenues for effective share value preservation and tech
startups as well as investors will do well to employ this clause in either forms. It’s important to
seek quality advisory however before inserting anti dilution clauses in contractual
arrangements.
References
1.https://corporatefinanceinstitute.com/resources/equities/anti-dilution-provisions/ accessed on
April 5 2023
2.https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.investopedia.com/terms/a/
antidilutionprovision.asp%23:~:text%3DThe%2520two%2520common%2520types%2520of,are%2520issue
d%2520in%2520later%2520rounds.&ved=2ahUKEwiy2aeSJLAhUGhf0HHXlcAvMQFnoECAwQBQ&usg=AOvVaw1GLLSfFw0RbRMCmCWscsqu accessed on April 5 2023
Visit our website for more details and follow us on our social media handles for news updates and
informative articles.
Website: www.scottslegal.com
Email: info@scottslegal.com
Twitter: scott_legal
Instagram : Scott’s legal
LinkedIn- Scott’s Legal