Anti-Dilution
Definition
A protection clause (almost always for investors, not employees) that adjusts the investor's share price downward if the company raises a future round at a lower valuation (a "down round"). The most common types are full ratchet (adjusts to the new lower price entirely) and weighted average (adjusts proportionally based on the amount raised).
Real-World Example
An investor buys shares at $10/share with weighted-average anti-dilution. The company later raises a down round at $5/share. The investor's conversion price is adjusted to approximately $7.50/share, meaning they effectively own more shares. Common stockholders (employees) bear the cost of this adjustment through additional dilution.
Common Mistake
Thinking anti-dilution protects everyone. Anti-dilution clauses protect investors at the expense of common stockholders (founders and employees). In a down round with strong anti-dilution provisions, employees can see their ownership percentages crushed significantly more than the investors.
Why It Matters
Anti-dilution provisions determine who bears the pain in a down round. As an employee holding common stock, understanding the investor's anti-dilution terms tells you how exposed you are if the company stumbles.
Related Terms
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