What are anti-dilution provisions?
Anti-dilution provisions are clauses in investment contracts that protect shareholders from ownership dilution. Unlike pro-rata rights, which allow investors to invest additional money to maintain their ownership, anti-dilution provisions increase the conversion ratio of a share class, enabling each share to convert into more common stock.
There are three types of anti-dilution provisions:
Broad-based weighted average: This common provision increases the conversion ratio for preferred shares based on the proportion of new shares issued at a lower price relative to all outstanding shares.
Narrow-based weighted average: Similar to the broad-based version, this provision excludes options, warrants, and sometimes other non-preferred shares from the calculation, resulting in higher conversion ratios for protected investors.
Full-ratchet: The most favorable for investors, this provision sets the conversion price to the lowest price offered in the new round, significantly increasing conversion ratios even if few new shares are issued.