How is weighted average anti-dilution calculated?

The formula for a broad-based weighted average is: (Common outstanding previously issued + common issuable for the amount raised at the prior conversion price) ÷ (Common outstanding previously issued + common issued in the new deal).

How does broad-based weighted average anti-dilution work?

Broad-based weighted-average anti-dilution protection results in shares of preferred stock being convertible into additional shares of common stock, but unlike a ratchet provision, the size of the adjustment depends on the number of shares sold relative to the company’s existing stock as well as the difference in the …

What is weighted average ratchet?

Unlike full ratchet anti-dilution protection that is effectively a “ do-over,” weighted average anti-dilution protection gives consideration to the relationship between the total shares outstanding as compared to the shares held by the original investor.

What is narrow based weighted average anti-dilution?

A narrow-based weighted average is an anti-dilution provision used to ensure that investors aren’t penalized when companies issue new shares. It takes into account only the total number of outstanding preferred shares for determining the new, weighted-average price for the old shares.

What is a ratchet in VC?

A ratchet in private equity is a mechanism to vary the amount of equity held by founders, managers and employees post-investment. In a venture capital context, ratchets operate as anti-dilution provisions. They protect early-stage investors from dilution by subsequent fundraisings at lower entry prices.

What is dilution protection?

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 or new equity issuance occur.

How does anti-dilution protection work?

Anti-dilution provisions protect an investor’s equity stake from dilution. A company may issue new shares with a round of equity financing or let its options exercised by their owners. In either case, the total number of shares outstanding will increase, while the investor still owns the same number of shares.

What is weighted average anti-dilution protection called?

The most common anti-dilution protection is called “weighted average” anti-dilution protection.

What does it mean to have anti dilution protection?

Consequently, upon conversion, existing investors with dilution protection would receive more shares of the company, thereby letting them maintain their original ownership stake percentage. Anti-dilution provisions come in two main varieties: full ratchet and weighted average anti-dilution protection.

How does broad based formula affect anti dilution?

The effect of including the additional shares in the broad-based formula reduces the magnitude of the anti-dilution adjustment given to holders of preferred stock as compared to the narrow-based formula.

Why is the full ratchet anti Dilution Adjustment important?

Full ratchet: The full-ratchet anti-dilution adjustment is considered detrimental to the founders and other early common stockholders because it reduces the conversion price to the lowest price at which stock is issued after the issue of preferred stock. It does not take into account the number of shares issued.