An anti-dilution clause is a provision in an investment agreement. It protects investors when a company issues new shares at a lower price than the original investment price.

Venture capital firms and startup investors commonly use anti-dilution clauses during fundraising rounds. The provision helps protect the value of an investor’s ownership stake and reduces the impact of equity dilution.

If a company raises capital at a lower valuation, investors refer to it as a down round. In this situation, the provision adjusts the investor’s conversion price or share allocation. As a result, investors can preserve a larger portion of their ownership.

There are two common types of anti-dilution protection:

• Full-Ratchet Anti-Dilution: This method offers strong investor protection. It adjusts the conversion price to match the new lower share price.
• Weighted Average Anti-Dilution: This method uses a formula that considers the new share price and the number of shares issued. As a result, it creates a more balanced adjustment.

For example, an investor may purchase shares at $10 per share. Later, the company may issue new shares at $7 per share. The provision can adjust the investor’s conversion rate. Therefore, the investor experiences less dilution.

Anti-dilution protection helps investors preserve the value of their equity investments during future funding rounds. This protection is especially important for startups because company valuations can change significantly over time.

However, these provisions can affect founders and existing shareholders. Additional shares may reduce their ownership percentages. Therefore, companies should balance investor protections with long-term ownership goals.