New Jersey Anti-Dilution Adjustments
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How to fill out Anti-Dilution Adjustments?
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FAQ
Typically, one share of preferred stock converts to one share of common stock, but anti-dilution provisions adjust the conversion ratio to offset value dilution by increasing the number of common shares that one share of preferred stock converts into.
Weighted average anti-dilution protection gives consideration to the relationship between the total shares outstanding as compared to the shares held by the original investor. The formula is CP2 = CP1 * (A+B) / (A+C).
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.
Very simply, if the original conversion price was $5 and in a later round the conversion price is $2.50, the investor's original conversion price would adjust to $2.50. The weighted average provision uses the following formula to determine new conversion prices: C2 = C1 x (A + B) / (A + C)
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.
Anti-dilution provisions are clauses that allow investors the right to maintain their ownership percentages in the event that new shares are issued. They are rights that are usually associated with preferred shares.
For Instance, if an investor holds preference shares at $10 per share, as per full ratchet anti-dilution provisions, if the company issues new shares at $5 per share, the investor has the right to buy twice as many shares, by converting their stake of preferred shares to common stock.
It is made to protect the investor's rights and can be an outstanding obligation for an entrepreneur to fulfill. An anti-dilution provision is a contractual clause typically included in investment agreements, such as convertible notes or preferred stock agreements, to protect investors' rights.
