“Weighted-Average Anti-Dilution Protection” is the most common form of Anti-Dilution Protection for Preferred Stock Financings. The Weighted-Average Anti-Dilution Protection increases the number of shares of Common Stock into which the applicable series of Preferred Stock can convert.

In a Preferred Stock Financing, Investors often will require Anti-Dilution Protection so that, if the company issues Securities in the future at a price per share below what the Investors paid for their shares of Preferred Stock (e.g., a later Down-Round Financing), the Conversion Price for such shares of Preferred Stock will be adjusted so that such shares of Preferred Stock will convert into a greater number of shares of Common Stock after the adjustment.

There are two ways to calculate the Weighted-Average Anti-Dilution Protection – “Narrow-Based” and “Broad-Based” (which is more commonly used). With the Narrow-Based calculation, the value of “A” in the formula below only includes the shares of Common Stock actually issued and outstanding; and with the Broad-Based calculation, the value of “A” in the formula below includes the shares of Common Stock actually issued and outstanding as well as the shares of Common Stock issuable, as applicable, under a Stock Option Plan and upon the conversion of all Convertible Securities then outstanding.

The formula typically used to calculate the adjustment for Weighted-Average Anti-Dilution Protection is:

Adjusted Conversion Price = (Prior Conversion Price) x ((A+B)/(A+C)), where:

  • A = the total number of shares of Common Stock previously issued (with such number depending on whether the Narrow-Based or Broad-Based calculation is used);
  • B = the total number of shares of Preferred Stock issuable for the new amount raised at the prior Conversion Price; and
  • C = the total number of shares of Preferred Stock issued in the new round of Preferred Stock Financing.

For more information regarding Equity Financing matters, please see the related webinar from the Legal INCubator: “From Convertible Debt to Series A – Why Discounts, Caps and Dilution Matter.”