Glossary / Anti Dilution Clause
An anti-dilution clause is a provision in a contract or agreement that protects an investor from dilution of their ownership stake in a company. It is commonly used in investment agreements, such as preferred stock or convertible note agreements. The purpose of an anti-dilution clause is to ensure that if a company issues additional shares of stock at a lower price than what the investor paid, the investor's ownership percentage is protected. This is important because it prevents the investor from losing value in their investment due to the issuance of new shares at a lower price. There are two main types of anti-dilution clauses: full ratchet and weighted average. - Full ratchet: Under a full ratchet anti-dilution clause, if the company issues new shares at a lower price, the conversion price of the investor's preferred stock or convertible note is adjusted downward to match the new price. This means that the investor receives additional shares to compensate for the decrease in value. - Weighted average: Under a weighted average anti-dilution clause, the conversion price is adjusted based on a formula that takes into account both the new price and the number of new shares issued. This is a more common type of anti-dilution clause and is considered to be more investor-friendly than the full ratchet clause. Overall, an anti-dilution clause provides protection to investors by ensuring that their ownership stake in a company is not significantly diluted by future issuances of shares at a lower price.