I have often used the word “dilution” in the previous post. Raising more money dilutes the founders (+employees) ownership but it also helps the company to keep executing which means that everyone owns a little less at a higher valuation. Do check out the previous posts (Day 5: ESOPs and Day 15: Cap table) to look at examples of dilution.

In this post, we will talk more about anti-dilution right. What does Anti-Dilution Right mean? This is a right vested with the investors to retain their stake in the company, irrespective of changes to the capital structure which might be not favorable to the investor.

The most common cause is the dilution due to price differential. If the company raises money from a new source and the price per share of this subsequent fundraise is less than the price paid by the investor, then the investor would be protected from the anti-dilution of her shares. The investor may provide for certain exceptions, for example, if these shares are subscribed at a lower price under the ESOP scheme.

In the next post, we will discuss the strategies used to protect against such dilution, mainly full-ratchet anti-dilution, and weighted average anti-dilution.