Dilution usually occurs in 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 originally paid. Anti-dilution clauses can take two main forms: it can be a full ratchet or a weighted average ratchet. Full Ratchet: The anti-dilution adjustment of the Full Ratchet is considered detrimental to founders and other early common shareholders because it reduces the conversion price to the lowest price at which the shares are issued after the preferred shares are issued. It does not take into account the number of shares issued. In India, there are two types of dilution protection available to investors: 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 held by the original shareholders. A price-based anti-dilution agreement protects investors from future issuance of shares at a lower price than that paid by the original investors. A full ratchet anti-dilution clause offers the greatest protection to investors. Nevertheless, it is a restrictive clause. This type of clause protects existing shareholders from dilution if there is a new issue of shares at a lower price than originally paid by the existing shareholder.

In practice, inhibiting full ratchet dilution ensures that existing shareholders retain their interest percentage without incurring additional costs when the company prepares additional financing rounds. This will be achieved by lowering the conversion price to allow existing shareholders to convert their preferred shares into a certain percentage of common shares. In such a case, the shareholder receives more shares for his initial investment. The anti-dilution provision protects investors from such uncertainties where the company can raise more funds at a lower cost at the expense of the original investors. For example, suppose XYZ Limited holds 1,000 outstanding shares, of which Investor A holds 350 shares. This means that Investor A owns 35% of the company`s shares. In the second round of financingSeries b Financing Series B financing (also known as Series B round or Series B financing) is one of the steps in the process of raising capital from a startup. Essentially, the Series B round is the third stage of seed financing and the second stage of venture capital financing., the company issues an additional 1,000 shares for subscription to new investors in order to raise capital for expansion. All investors dream that the value of their shares will increase, but due to the state of the market, their hopes are dashed, which jeopardizes the compromise of their property.

It protects existing shareholders when the company issues other shares to investors and protects investors from market uncertainties. Now the number of shares outstanding increases until the year 2000, so A`s share is reduced to 12.5%. The value of existing investors automatically decreases if the new shares are issued at a much lower cost than the existing investor paid first. Sometimes there is a situation where the company does not function well, so the shares are issued at a lower cost. The role of anti-dilution clauses is to bail out existing shareholders, which helps them maintain their stake in a company at a certain level. The anti-dilution safeguard clause is generally granted to existing shareholders if, as a result of subsequent financing rounds, the company issues new shares at a rate lower than the price paid by existing investors. The inclusion of an anti-dilution adjustment clause in the company`s articles of association offers several advantages. Advantages: The meaning of the anti-dilution adjustment clause is as follows: This mechanism allows a shareholder to increase the value of his stake at the issue price of the new share.

The formula adjusts the conversion rate of preferred shares into common shares based on the amount raised prior to the new round and the average price per share at which it was raised and the amount increased in the next round, as well as the price per share at which the new capital is raised. In the absence of the anti-dilution adjustment clause in the securities agreement, existing shareholders are exposed to a decrease in ownership and a decrease in the value of their inventory. To understand the concept of dilution protection, we must first understand the concept of dilution. Due to incoming shares in subsequent funding rounds, there is a decrease in the share of shareholders in a company, which is called dilution. On the other hand, we can say that if there is an increase in the outstanding shares of a company, there will be a decrease in the percentage of shareholder shares. Here`s an example of dilution protection: Suppose an XYZ company has 1000 shares outstanding, of which A holds 250 shares. That is, the investor owns 25% of the shares of a company. XYZ Company issues an additional 1000 shares to subscribe shares to new investors in order to raise capital on the basis of the second round of financing. A contractual anti-dilution adjustment is an agreement between the original investors and the Company in which the Company agrees to issue additional common shares to the investors in order to maintain their interest in the Company until the Company raises the necessary capital. It protects shareholders against dilution of their stake through new share issues in the future. Under Indian law, some practical challenges are imposed in a full ratchet mechanism. In the full-tier ratchet mechanism, shares are issued without further payment from existing shareholders, but under Indian company law, no shares can be issued by the discount company.

Therefore, it is not possible for a company to continue to issue at no cost to existing shareholders. Board members representing investors may face downward conflicts. This is because directors can negotiate the terms of a bear cycle on behalf of investors and must also approve the transaction as their director`s role. Price-based anti-dilution adjustment takes two forms: we successfully plan and draft shareholder agreements. Contact us, your Florida attorney, to help you develop an anti-dilution clause or other relevant provisions of the shareholders` agreement. Shareholder agreements should determine whether shareholders (if any) have the right to allocate new shares to the public for subscription, which dilutes the value of shares held by the original shareholders. A price-based anti-dilution agreement protects investors from future issuance of shares at a lower price than the original investors. Weighted average: When determining the conversion ratio in a bearish cycle, the weighted average adjustment takes into account the lower price and the number of new shares issued in the bear cycle. .