Utah Anti-Dilution Adjustments
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How to fill out Anti-Dilution Adjustments?
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FAQ
The conversion ratio is 1 to 1. Adjusting the conversion ratio can be used to maintain an investor's value in the company through anti-dilution provisions. The idea is that the investor paid too much for the shares early in the company's life.
Downround protection, also known as anti-dilution protection, is a clause in investment agreements that protects early investors from the negative effects of a subsequent funding round that values the company at a lower price per share.
A down round is when a company raises a financing round of venture capital funding and the pre-money valuation of the company is lower than the post-money valuation of the previous round. Down rounds are different from bridge rounds, which help founders extend their last round of fundraising.
Anti-dilution provisions act as a buffer to protect investors against their equity ownership positions becoming diluted or less valuable. This can happen when the percentage of an owner's stake in a company decreases because of an increase in the total number of shares outstanding.
For example, with a conversion rate of $0.50, an investor with one preferred stock will end up with twice as many common shares upon conversion. The full ratchet anti-dilution provision is rare due to the burden placed on the company's founders and initial investors.
The main implication of a down round is the triggering of anti-dilution protection, which means that when shares get sold at a lower price than an investor had originally paid for them, the investor will be diluted less than the other parties.
What Is the Difference Between Up Rounds and Down Rounds of Financing? Both up rounds and down rounds are effective ways of raising capital, but the amount of capital raised differs. If the pre-money valuation increases, it is an up round, but if it actually decreases, it is a down round.
Anti-dilution clauses That is, in case shares are issued at a lower price than the price per share that was paid by the existing shareholder. This is achieved by granting such existing investors the right to receive additional shares (referred to here as ?anti-dilution shares'') for free in the course of a down round.
