Texas Anti-Dilution Adjustments
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How to fill out Anti-Dilution Adjustments?
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FAQ
Full-ratchet anti-dilution protection gives the original investor rights to that number of shares of common stock as if he paid the current round's lower price. The National Venture Capital Association defines full-ratchet as ? the conversion price will be reduced to the price at which the new shares are issued.
In the venture capital and private equity context, a provision which protects an equity holder from dilution due to subsequent equity issuances (issued either directly or indirectly through options or convertible securities).
Exceptions to anti-dilution clauses These typically include shares issued pursuant to the exercise of share options or pursuant to warrants or other convertible instruments that are already outstanding on the issue date of the relevant convertible instruments.
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.
The two common types of anti-dilution clauses are known as "full ratchet" and "weighted average." With a full ratchet provision, the conversion price of the existing preferred shares is adjusted downward to the price at which new shares are issued in later rounds.
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.
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.
The anti-dilution adjustment clause is a provision contained in a security or merger agreement. The anti-dilution clause provides current investors with the right to maintain their ownership percentage in the company by purchasing a proportionate number of new shares at a future date when securities are issued.
