# Anti-Dilution

This term means an investor's share price is retroactively adjusted in a later down round (an investment round sold at a price below the previous round) to get more shares.

**Anti-dilution - None:**

No adjustment

**Anti-dilution - Full Ratchet:**

Share price is adjusted all the way down to the new round price

**For example:**

An investor who paid $2 per share for a 10% stake would get more shares in order to maintain that stake if a subsequent round of financing were to come through at $1 per share. The early round investor would have the right to convert his shares at the $1 price, thereby doubling his number of shares.

**Anti-dilution - Weighted-Average (Broad):**

Share price is adjusted part way down to the new round price

**Formula: **OCP =** **ACP x (A + B) / (A + C)

OCP = Original Conversion Price

A = Common outstanding prior to deal

B = Common Issuable for amount raised at old conversion price

C = Common issued in deal

ACP = Adjusted Conversion Price

**For example:**

Assume that the pre-financing capitalization of the company is:

1,500,000 Common Stock

2,500,000 Series A Preferred Stock (issued at $1/share)

2,000,000 Series B Preferred Stock (issued at $2/share)

__1,000,000__ Options

7,000,000 Total

Also assume that there is a dilutive financing with the issuance of 2,000,000 shares of Series C Preferred Stock at $0.50 per share, for total gross proceeds of $1,000,000.

*Series A adjustment*

The Series A Conversion Price will be adjusted as follows:

Series A Conversion Price = $1.00 multiplied by (A + B) / (A + C)

= $1.00 * (7,000,000 + 1,000,000) / (7,000,000 + 2,000,000)

= $1.00 * (8/9) = $0.88

Thus, the number of shares of common issuable upon conversion of Series A is:

(2,500,000) x ($1.00 / 0.88) = 2,812,500

This results in a Series A Conversion Rate of 1.125:1

*Series B adjustment*

The Series B Conversion Price will be adjusted as follows:

Series B Conversion Price = $2.00 multiplied by (A + B) / (A + C)

= $2.00 * (7,000,000 + 500,000) / (7,000,000 + 2,000,000)

= $2.00 * (7.5 / 9) = $1.67

Thus, the number of shares of common issuable upon conversion of Series B is:

(2,000,000) x ($2.00 / $1.67) = 2,400,000

This results in a Series B Conversion Rate of 1.20:1

**Anti-dilution - Weighted Average (Narrow):**

Like broad but the share price is adjusted slightly more

**Formula:** OCP =ACP x (A + B) / (A + C)

OCP = Original Conversion Price

A = Common outstanding prior to deal

B = Common Issuable for amount raised at old conversion price

C = Common issued in deal

ACP = Adjusted Conversion Price

*****(Common Outstanding = Common issuable upon conversion of particular series of preferred stock)**

**For example:**

Using the same example above the narrow-based formula works as follows:

*Series A adjustment*

The Series A Conversion Price will be adjusted as follows:

Conversion Price of Series A = $1.00 multiplied by (A + B) / (A + C)

= $1.00 * (2,500,000 + 1,000,000) / (2,500,000 + 2,000,000)

= $1.00 * (3.5/4.5) = $0.77

Thus, the number of shares of common stock issuable upon conversion of Series A Preferred Stock =

(2,500,000) x ($1.00/$0.77) = 3,214,285

This results in a Series A Conversion Rate of 1.29:1

*Series B adjustment*

The Series B Conversion Price will be adjusted as follows:

Conversion Price of Series B Preferred Stock = $2.00 multiplied by (A + B) / (A + C)

= $2.00 * (2,000,000 + 500,000) / (2,000,000 + 2,000,000)

= $2.00 * (2.5 / 4.0) = $1.25

Thus, the number of shares of common stock issuable upon conversation of Series B Preferred Stock =

(2,000,000) x ($2.00/$1.25) = 3,200,000

This results in a Series B Conversion Rate of 1.6:1