Objective

Anti-dilution provisions are contractual safeguards primarily included in venture capital term sheets to protect holders of Preferred Shares (investors) from the value of their equity being reduced (diluted) in a down round, which is a subsequent financing round where new shares are issued at a lower price than the investor originally paid. The provision works by adjusting the conversion ratio of the investor's convertible preferred stock into Common Shares. A downward adjustment of the conversion price effectively grants the investor more common shares upon conversion to maintain their ownership percentage or investment value. The two main types are Full Ratchet, which is the most protective for the investor, and Weighted Average, which is considered a more balanced approach that accounts for the size of the down round.

Subjective

I see anti-dilution clauses as one of the most punitive aspects of the standard venture structure, as they often disproportionately shift the financial burden of a down round onto the founders and employees. While investors need downside protection, a Full Ratchet provision can severely dilute the common shareholders, potentially leading to a loss of motivation and making it harder to attract or retain talent. Negotiating for broad-based weighted average anti-dilution is crucial because it spreads the dilution more fairly, preventing a minor misstep from triggering an overly harsh outcome for the people building the company.

Contexts

• #venture-capital