Now suppose XYZ decides to go public and issue common shares for 10 $US per share. This clearly devalues the incentive to convert your preferred share into common shares, as you would trade your $15 investment for a common share worth only $10. An anti-dilution provision could protect you if it says that if XYZ issues shares at a lower price than previous financing cycles, the preferred shareholder receives more common shares when converting. Partners can only negotiate the existence of such a clause in certain circumstances. In addition, this means that the anti-dilution clause can protect a shareholder while facing another disadvantage. This is particularly dangerous when it is unfavorable to the founding partner. For example, if the shares of a founding partner are diluted, this dilution can affect the business and hinder the growth of the company. When a company issues new shares to the public for subscription, this issue is seen as a means of diluting the value of the shares of the original shareholders. A price-based anti-dilution agreement protects investors from the future issuance of shares at a lower price than initial investors have paid. The inclusion of an anti-dilution clause in the corporate CharterCompany BylawsCompany`s statutes are the rules governing the management of a business and one of the first positions defined by the Board of Directors at the time of the creation of a company. Such statutes are generally established after the submission of the statutes, encourages the company to seek higher valuations in new funding cycles. It also encourages the company to continuously achieve the milestones identified by investors, such as revenue targets and other growth objectives, in order to increase the value of its common shares.
The dilution is usually due to the second or third round of capital raising. The anti-dilution clause protects investors from dilution if the company issues new shares at a lower price than was originally paid. Anti-dilution clauses can take two main forms – they can be either complete ratchets or weighted average ratchets.