# 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:

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.

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

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.

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

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):

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

***(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:

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

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