Why anti-dilution provision matters to a first-time founder
Anti-dilution provisions protect some investors if a later funding round has a lower share price. They can leave founders, employees and unprotected shareholders with a smaller ownership percentage. The formula matters because different methods can produce very different ownership outcomes.
Examples of anti-dilution provision
An investor buys preferred shares at US$4 each. The company later raises money at US$2 a share. A full-ratchet clause may treat the earlier investment as if its price had also been US$2. A weighted-average clause considers both prices and how many shares were issued, so it usually makes a smaller adjustment.
Common misunderstanding
Anti-dilution protection does not stop every reduction in ownership percentage. It usually applies only to share issues covered by the agreement and changes how protected securities convert into ordinary shares. Employee options and other agreed issues may be excluded. The documents and governing law control the exact result.
When to use it
Calculate the effect before signing a term sheet and before any lower-priced round, option grant or convertible issue that might trigger the clause. Compare the results under each proposed formula. Ask experienced venture counsel to check exclusions, waivers and the ownership calculation.