What is Anti-Dilution? Plain English Explanation
Definition
An anti-dilution clause protects investors from having their ownership percentage reduced when a company issues new shares at a lower valuation. It adjusts the investor's conversion price to maintain their proportional ownership.
Why It Matters in Contracts
For startup founders and early employees with equity, anti-dilution provisions held by investors can significantly reduce your ownership stake if the company raises money at a lower valuation (a "down round").
Real-World Example
An investor buys 20% of a startup at $10 per share. The company later raises money at $5 per share. The investor's anti-dilution clause adjusts their shares so they maintain more ownership, while the founders' percentage shrinks.
What to Watch For
- 🔴Full ratchet anti-dilution (most aggressive, fully adjusts to new price)
- 🔴Weighted average vs. full ratchet (weighted average is more founder-friendly)
- 🔴No carve-outs for employee option pools
- 🔴Anti-dilution that applies to all future rounds without limits
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Disclaimer: This glossary entry is for educational purposes only and does not constitute legal advice. Consult a qualified attorney for guidance on your specific situation.