Dilution protection

Dilution protection,

Definition of Dilution protection:

  1. Dilution protection refers to contractual provisions that seek to restrict a corporation's power to reduce an investor's stake in the company, after later funding rounds occur. Dilution protection kicks in when a company's actions threaten to diminish an investor's overall percentage claim on the company's assets.

  2. For example, if an investor's initial stake is 20%, before the company initiates a subsequent funding round, it must first offer discounted shares to that investor, in order to preemptively mitigate the dilution of his or her overall ownership stake. Sometimes referred to as "anti-dilution protection," dilution protection is common in venture capital funding agreements.

  3. Standard provision in share purchase agreements, and convertible bond indentures, that seeks to prevent reduction (dilution) in the value of the security due to the issuance of new shares or bonds. It requires the maintenance of the same share value or an adjustment in the bonds conversion ratio.

How to use Dilution protection in a sentence?

  1. The two types of anti-dilution provisions are full ratchet anti-dilution, and weighted average anti-dilution, which differ based on the level of protection each plan offers investors.
  2. Dilution protection is a provision ensuring that the percentage of an early investor's stake will not become diminished after new shares are introduced during later funding rounds.
  3. Dilution protection is a necessary enticement offered by venture capitalists, whose companies are more likely to shutter their doors, than existing corporations. .

Meaning of Dilution protection & Dilution protection Definition