Friday, September 21, 2018

Broad-Based Weighted-Average Anti-Dilution Protection

Term Definition
Broad-Based Weighted-Average Anti-Dilution Protection

Anti-dilution protection refers to the rights and privileges of securities that provide the holder of the securities some protections against future issuances of new securities that, without these anti-dilution protections, dilute the holder's securities in terms of percentage ownership, control or participation in financial benefits.

Anti-dilution provisions are negotiated between a company and a potential investor.  It is a common anti-dilution formula to use in a mechanism of anti-dilution protection of convertible securities, to use the broad-based weighted average anti-dilution adjustment formula to increase thereafter the number of shares of common stock issuable upon conversion. The conversion ratio of convertible securities is usually adjustable, and conversion adjustments and related adjustment mechanisms often take into account the sale of new securities at a price below the conversion price of the securities, as it may be adjusted from time to time.  Usually a series of convertible preferred stock will have a broad-based weighted-average anti-dilution adjustment in venture capital transactions, and if the company ever sells any shares of common stock at a price below the conversion price of the preferred stock that is owned by this venture capitalist, the conversion ratio would be adjusted with a formula, called the "broad-based weighted average anti-dilution formula".  The number of shares  of common stock that is issued on conversion would be adjusted higher by this formula. The formula changes the conversion ratio to take into account its effect on the company-wide fully-diluted book value per share of common stock.  The narrow-based weighted average anti-dilution adjustment is very similar, although it does not take as many of the unissued shares  into account.  A very different anti-dilution adjustment is called "full-ratchet".