Indiana Anti-Dilution Adjustments
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How to fill out Anti-Dilution Adjustments?
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FAQ
Anti-dilution provisions protect an investor's equity stake from dilution. A company may issue new shares with a round of equity financing or let its options exercised by their owners. In either case, the total number of shares outstanding will increase, while the investor still owns the same number of shares.
There are a number of ways to protect the value of your company's equity and to avoid dilution. One way is to limit the number of new shares that are issued. Another way is to increase the price of the shares that are issued.
Anti-dilution provisions act as a buffer to protect investors against their equity ownership positions becoming diluted or less valuable. This can happen when the percentage of an owner's stake in a company decreases because of an increase in the total number of shares outstanding.
To avoid excessive founder equity dilution, remember to: Set clear and favorable terms from the start; Limit excess funding with post-money SAFEs; Be wary of pro-rata rights; Base your ESOP pool on data; Limit the amount of stock dilution via accelerators and advisors.
For example, with a conversion rate of $0.50, an investor with one preferred stock will end up with twice as many common shares upon conversion. The full ratchet anti-dilution provision is rare due to the burden placed on the company's founders and initial investors.
One way to reduce the risk of equity dilution is to limit the number of shares that are issued. A company can do this by setting a maximum number of shares that can be issued, or by authorizing a smaller number of shares than what is actually issued.
Non-dilutive funding can take many forms. Common types include crowdfunding, loans from family, licensing, product royalties, tax credits and other awards.
The conversion ratio is 1 to 1. Adjusting the conversion ratio can be used to maintain an investor's value in the company through anti-dilution provisions. The idea is that the investor paid too much for the shares early in the company's life.
