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Understanding Investor Rights: Anti-dilution Rights
- Investors ensure that they have adequate safeguards in place in the shareholders’ agreement (SHA), such as Pre-emptive Rights and Anti-Dilution Rights.
- Pre-Emptive Rights allows the existing investor to participate in the new issuance of shares up to its pro-rata stake by buying additional securities in the Company and the Company secures additional funds from the existing investors.
- Anti-Dilution Right available to the investor entail issuance of shares and safeguarding the interest of the investor.
- Pre-emptive Rights and Anti-Dilution Rights work in different scenarios and involve different mechanisms to safeguard the rights of the Investor.
- Investors negotiate Anti-Dilution Right to safeguard their interest in the company if it secures additional funds at a valuation that is lower than the valuation in the previous round.
- Excluded or exempted issuances by the Company are not considered as dilutive issuance.
- Adjustments can be made through Anti-Dilution provision by adjusting the conversion ratio of the securities held by the Investor.
- Additional shares can be issued without having to pay any additional amount, new shares issued and the prevailing price is computed.
- Broad Based Weighted Average Anti-Dilution method and Full Ratchet Anti-Dilution method are used to compute the increase in number of shares or the price effectively.
- Full Ratchet Anti-Dilution method provides maximum protection to investors, while the broad-based weighted average method provides protection to some extent.
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