Dilution Protection
Contents
Decoding Dilution Protection: A Comprehensive Guide
Understanding dilution protection is crucial for investors, particularly in the realm of venture capital. This article explores the concept of dilution protection, its significance, types, and potential drawbacks.
Delving into Dilution Protection
Dilution protection safeguards investors' ownership percentage in a company, preventing it from diminishing when new shares are issued. It's a common provision in venture capital agreements, aimed at enticing investors into risky ventures.
Types of Dilution Protection
Two main types of dilution protection exist: full ratchet and weighted average. While both aim to maintain investors' ownership stakes, they differ in their approach and level of protection offered.
Understanding Full Ratchet and Weighted Average
Full ratchet provisions adjust conversion prices downward to match the price of new shares issued in later rounds. Weighted average provisions use a formula to determine new conversion prices, offering a less aggressive approach to protection.