Anti-Dilution Provision

A contractual term that adjusts an earlier investor's conversion price downward if a later round prices shares lower, protecting them from a down round's effect on their ownership.

Example

An investor who bought preferred at 2.00 a share may see their effective conversion price reduced if the next round prices at 1.20 a share, depending on the specific formula in their agreement.

Important

The protection comes at the direct expense of common shareholders and any investor without the same term, who absorb the resulting extra dilution.

Related terms

  • Down Round — A financing round priced at a lower valuation, or lower price per share, than the company's previous round.
  • Dilution — The reduction in your percentage ownership of a company when it issues new shares to someone else.
  • Liquidation Preference — A contractual right for preferred shareholders to receive a stated multiple of their investment back before common shareholders receive anything, in a sale or wind-down.

Lessons that explain it

  • A smaller slice of a much bigger company is usually the good outcome — Each funding round reduces existing holders' percentage. Dilution is not a loss in itself; it becomes one when the company's value does not rise enough to compensate, as in a down round. (12 min)
  • Ordinary dilution can halve your stake before anyone does anything wrong — Six checks on one specific deal: the terms, the cap table ahead of you, what your stake becomes after several more rounds of nothing going wrong, the preference stack, the traction evidence, and whether you have reserved capital to defend the position at all. (14 min)
  • A term sheet sets two things: who gets the money and who gets the say — Every clause in a term sheet affects either the economics - how proceeds are divided - or control - who can make or block decisions. Valuation is only one economic term among several. (10 min)
  • Board seats, vetoes, drag-alongs and anti-dilution decide who holds power in a crisis — Control terms rarely matter when a company is thriving. They matter in down rounds, disputed sales and restructurings - exactly when founders and small investors most need to understand them. (12 min)

All 578 terms in the Investing glossary