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What is an Anti-Dilution Provision? 

An anti-dilution provision is a clause in an investment agreement that protects an investor from dilution of their ownership percentage in the event that new shares are issued at a price lower than the investor originally paid. It is commonly included in venture capital and private equity agreements.

How It Works:

• Types: Two main types are full ratchet and weighted average.some text
  • Full Ratchet: Adjusts the conversion price of the existing shares to the new lower price.
  • Weighted Average: Adjusts the conversion price based on the average price of new shares issued.
• Trigger: Activated when the company issues new shares at a lower price than the initial investment price.

Advantages: 

Anti-dilution provisions protect early investors by maintaining their ownership percentage and investment value. They ensure that early investors are not unfairly diluted by future funding rounds at lower valuations.

Disadvantages: 

These provisions can be unfavorable for founders and other shareholders, as they may lead to significant dilution of their ownership. They can also complicate future financing rounds and negotiations with new investors.

Impact on Future Funding: 

Anti-dilution provisions can influence the company's ability to attract new investors, as the adjustments may lead to complex cap tables and reduced incentives for new investments. It is crucial for companies to balance protecting early investors with maintaining flexibility for future financing rounds.

Example: 

In 2008, during the financial crisis, Facebook issued new shares at a lower price to attract investors. Early investors with anti-dilution provisions had their ownership percentages adjusted to reflect the new lower share price, thereby protecting their initial investment value.

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