An “Anti-Dilution Adjustment” is a formula set forth in an Anti-Dilution Protection provision of a financing instrument, which adjusts the price of an existing Equity Security in order to prevent dilution of its original value. It typically is triggered when later shares of Capital Stock are sold or issued at a price per share that is less than the relevant Investor paid in an earlier financing round.
For Preferred Stock investments, the Anti-Dilution Adjustment typically is achieved by adjusting the conversion price between the applicable series of Preferred Stock and Common Stock based on the lower-priced issuance of stock in the future, which helps protects an investor’s ownership stake from Dilution. Anti-Dilution Adjustments are most commonly based on Weighted-Average Anti-Dilution Protection or, much less so, on Full-Ratchet Anti-Dilution Protection.
For more information regarding Anti-Dilution Adjustment issues, please see the related resources from the Legal INCubator: