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Shareholder Agreements: Full-Ratchet Anti-Dilution Clauses in Company Fundraising
- Anti-dilution clauses are designed to protect shareholder's ownership stake during the company’s fundraising rounds.
- Full ratchet anti-dilution clause is more restrictive for companies planning for multiple fundraising rounds. It reduces the conversion price of preference shares to match the share issuance price of the next round when converted to ordinary shares.
- Weighted average ratchet anti-dilution clause is the standard protection for investors. It aims to reduce the impact of dilution and take into account factors such as the total shares outstanding and the capital that could have been raised.
- Overly diluting the ownership of founders or essential team members can remove their incentive to actively participate in driving the business growth.
- Negotiating the anti-dilution clause as a "Pay to Play" provision can balance the interests of both investors and the company.
- Ultimately, anti-dilution clauses play a critical role in protecting investor interests while creating challenges for companies seeking to raise additional capital in the future.
- Companies should approach anti-dilution clauses with caution, carefully weighing their long-term implications on ownership structure, founder motivation, and future fundraising potential.
- By carefully weighing the pros and cons and seeking expert advice when needed, entrepreneurs can make informed decisions that protect both investor interests and the company’s long-term success.
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