In the venture capital and private equity context, a provision which protects an equity holder from dilution ( www.practicallaw.com/0-504-3650) due to subsequent equity issuances (issued either directly or indirectly through options or convertible securities). This protection can be provided by giving equity holders:
Pre-emptive rights ( www.practicallaw.com/2-382-3697) to purchase their pro rata ( www.practicallaw.com/7-382-3713) share in a subsequent equity offering.
Corporate structural anti-dilution provisions, designed to proportionally adjust (at no cost to the equity holder) the number of shares underlying an equity holder's exercisable or convertible securities (such as a warrant ( www.practicallaw.com/5-382-3907) or convertible preferred stock ( www.practicallaw.com/4-382-3700) ) and the related exercise or conversion price on certain corporate events affecting the structure of the company's capitalization as a whole. These events include a stock split ( www.practicallaw.com/7-501-6342) , reverse stock split ( www.practicallaw.com/7-385-7208) , dividend paid in common stock (or options or convertible securities), merger ( www.practicallaw.com/3-382-3625) , consolidation or other reorganization ( www.practicallaw.com/4-382-3757) .
Price protection anti-dilution provisions, designed to decrease (at no cost to the equity holder) the exercise or conversion price of an equity holder's exercisable or convertible securities and proportionately increase the number of shares underlying the securities on a subsequent issuance of common stock (issued either directly or indirectly through options or convertible securities for common stock) in a down round investment ( www.practicallaw.com/3-422-1256) priced below the equity holder's original purchase price (or sometimes current fair market value). Purchase price anti-dilution provisions can either be:
weighted average, reducing the applicable price to the weighted average price at which the company has sold its securities, including the sale of securities in the down round issuance; or
full ratchet, reducing the applicable price to the price used in the down round issuance.
Veto rights to approve any subsequent equity issuances.
For a detailed discussion of anti-dilution provisions, see Practice Note, Anti-Dilution Provisions in Private Equity Transactions ( www.practicallaw.com/5-547-8051) . For a form of warrant containing standard anti-dilution provisions, see Standard Documents, Warrant (General Form) ( www.practicallaw.com/2-501-1200) and Warrant (Penny Warrant Form) ( www.practicallaw.com/0-502-5552) . For an outline of the main issues and negotiating points in the anti-dilution provisions of a general form of warrant, see Negotiating Warrant Anti-Dilution Provisions Checklist ( www.practicallaw.com/3-503-7271) .
In the context of publicly-traded debt securities convertible into common equity, a provision that protects the conversion value of the security against the impact of a corporate event that transfers company assets from the company to existing common stockholders. For more information on anti-dilution adjustments in publicly-traded convertible bonds, see Practice Note, Anti-Dilution Adjustment Formulas in Convertible Bonds ( www.practicallaw.com/4-505-2987) .