ANTI-DILUTION CLAUSE

The inclusion of the anti-dilution clause in the investment agreement aims to safeguard the investor’s stake in the share capital at the same percentage ratio without blocking the admission of new investors to the company, thereby facilitating its continued growth.

What is the anti-dilution clause?

The purpose of the anti-dilution clause is to safeguard the investor’s interests against the depreciation of their shares in the company resulting from the issuance of new shares at a price lower than that at which the shares were acquired. The anti-dilution clause grants the investor the right to adjust the number of their shares or receive alternative compensation in order stake in the company’s share capital at the same percentage ratio. The objective of the anti-dilution clause is to protect the value of the investor’s investment and to ensure the same proportion of the stake in the company’s share capital when faced with potential dilution caused by subsequent investment rounds of the company.

What forms can it take?

Basically, there are two forms of anti-dilution clause application, i.e. full-ratchet and weighted average.

In a full-ratchet mechanism, the existing shareholder’s shares are recalculated at the new issuance price (e.g., if new shares are issued at half the price, the existing shareholder is entitled to twice the number of shares).

Similarly to the full-ratchet, the weighted-average mechanism also involves recalculating shares at the new issuance price, and additionally, the existing shareholder may acquire additional shares from the new issuance.

How to ensure compliance with the obligation arising from the anti-dilution clause?

Parties may stipulate in the investment agreement that a breach of the anti-dilution clause may be subject to paying damages or contractual penalties; hence, when included in the articles of association, the significance of this clause increases.

In summary, the implementation of the anti-dilution clause aims to safeguard the investor from incurring financial losses during subsequent investment rounds. This ensures that the investor is protected should a future investment round was at a price lower than that set at the time of the investor’s entry into the investment.

At Hoogells, we understand that drafting and negotiating an investment agreement is a complex process. We are here to offer you our knowhow and expertise.