What is an Anti-Dilution Clause?
An Anti-Dilution Clause is a provision in investment agreements that safeguards existing investors against equity dilution from future share issuances at lower prices. It ensures early investors maintain fair value for their stake when the company raises additional capital.
How It Works
When a company issues new shares at a lower price than the original investor’s price, the anti-dilution clause adjusts the conversion ratio of preferred to common shares or issues additional shares to compensate.
Example
An investor holds preferred shares convertible to common stock at $10/share. If the company raises funds later at $7/share, the clause adjusts their conversion ratio to match the new lower price.
Benefits
Maintains investor equity value during down rounds.
Encourages investor confidence in early-stage, high-risk companies.
Standard provision in venture capital term sheets.