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