What is the meaning behind anti–dilution clauses?
This stipulation also protects the investor. Should shares be sold or investment secured for equity from another party at a later date, the original investor’s share in the business does not become diluted. There are two forms of anti-dilution which need to be understood:
Full Ratchet: In this scenario only the founders of the company dilute their share when securing future investment. If a third party agrees to invest money, the original investor’s stake remains the same in terms of value and control, while the founders have to dilute theirs in order to offer equity to the new investor(s).
Weighted: Here, dilution of the original investor’s stake does occur, but it is calculated against the number of shares offered to a new investor. Legal expertise is usually required in order to agree on how much dilution takes place.
Anti-dilution agreements are offered under some circumstances, but can in some cases be seen as a hindrance to the entrepreneurial process.