What is weighted average anti-dilution?

​Definition​ Weighted average anti-dilution is a form of anti-dilution that uses a relative (weighted) formula in a down round or other stock dilution to decrease the price at which preferred stock can convert into common stock.

What is the difference between a full ratchet and weighted average anti-dilution clause?

Unlike full ratchet anti-dilution protection that is effectively a “ do-over,” weighted average anti-dilution protection gives consideration to the relationship between the total shares outstanding as compared to the shares held by the original investor.

What is anti-dilution adjustment?

The anti-dilution adjustment clause is a provision contained in a security or merger agreement. The anti-dilution clause provides current investors with the right to maintain their ownership percentage in the company by purchasing a proportionate number of new shares at a future date when securities are issued.

What is pro rata right?

Pro rata rights represent an agreement between an investor and a company, whereby the company provides the investor the right—but not the obligation—to participate in one or more future rounds of financing. Companies typically award these rights to select (not all) investors.

What is an IPO ratchet?

Mutual funds have become significant investors in IPO financings, typically seeking two types of provisions: (1) redemption rights that allow them to escape (possibly if the IPO is delayed), and (2) a pricing “ratchet” that entitles them to additional shares in the event that the IPO prices below the valuation …

What is the difference between broad-based and narrow-based anti-dilution?

Typically, broad-based also includes common stock reserved for issuance pursuant to outstanding options and warrants. Narrow-based adjustments typically include only the common shares and preferred shares outstanding, not the shares reserved for issuance pursuant to outstanding options and warrants.

How does anti-dilution clause work?

Anti-dilution provisions are clauses built into convertible preferred stocks to help shield investors from their investment potentially losing value. Dilution can occur when the percentage of an owner’s stake in a company decreases because of an increase in the total number of shares outstanding.

What is meant by the term anti-dilution give an example?

An anti-dilution provision grants an investor the right to convert their preferred shares at the new price. Imagine you own preferred stock that you purchased for $20 per share. If the company that issued the shares goes public and issues shares at $15, the value of your investment would’ve gone down.

Is pro rata the same as anti-dilution?

On its own, the pro rata right protects your investor against dilution of his stake, but offers nothing against dilution of his value. For that reason, your investment termsheet might contain an anti-dilution protection, or “ratchet.”

How is pro rata dilution calculated?

The math to calculate the pro-rata amounts is simply (target ownership %) x (number of new shares being issued) x (share price at new round).