What is weighted average anti-dilution?
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A narrow-based weighted average is an anti-dilution provision used to ensure that investors aren’t penalized when companies issue new shares. It takes into account only the total number of outstanding preferred shares for determining the new, weighted-average price for the old shares.
How do you calculate anti-dilution?
Types of Anti-Dilution Provisions The weighted average provision uses the following formula to determine new conversion prices: C2 = C1 x (A + B) / (A + C)
How does broad-based anti-dilution work?
Broad-based weighted-average anti-dilution protection results in shares of preferred stock being convertible into additional shares of common stock, but unlike a ratchet provision, the size of the adjustment depends on the number of shares sold relative to the company’s existing stock as well as the difference in the …
What is the difference between broad-based and narrow-based anti-dilution?
Typically, broad-based also includes common stock reserved for issuance pursuant to outstanding options and warrants. Narrow-based adjustments typically include only the common shares and preferred shares outstanding, not the shares reserved for issuance pursuant to outstanding options and warrants.
What is anti-dilution protection?
Anti-dilution protection is how investors protect themselves in a down round. Anti-dilution is triggered when the conversion price for a round is less than the conversion price from the prior round (which is almost universally the same as the PPS for the preferred stock sold in that round).
What is a full ratchet anti-dilution versus weighted average anti-dilution?
Unlike full ratchet anti-dilution protection that is effectively a “ do-over,” weighted average anti-dilution protection gives consideration to the relationship between the total shares outstanding as compared to the shares held by the original investor.
Which is better full ratchet or weighted average?
Full ratchet provisions can be costly for founders and can undermine efforts to raise capital in future rounds of fundraising. That’s why weighted average approaches are a better alternative for founders than using the full ratchet provision.
What is price based anti-dilution protection?
Price-based antidilution protection, which is found in the charter documents of most venture-backed emerging growth companies, is used by many venture capital investors to minimize the dilution that occurs when a portfolio company issues stock in a down-round financing by increasing the rate at which the existing …
What is the difference between a full ratchet and weighted average anti-dilution clause?
What is full ratchet anti-dilution protection?
A full ratchet is an anti-dilution provision that applies the lowest sale price as the adjusted option price or conversion ratio for existing shareholders. It protects early investors by ensuring they are compensated for any dilution in their ownership caused by future rounds of fundraising.
What is the most founders friendly type of anti-dilution protection?
The broad-based weighted average anti-dilution provision is the best one for the founders. A broad-based weighted average for shareholders of a company’s preferred stock gives investors anti-dilution protection when a company issues new shares.
How is weighted average ratchet calculated?
The formula for a broad-based weighted average is: (Common outstanding previously issued + common issuable for the amount raised at the prior conversion price) ÷ (Common outstanding previously issued + common issued in the new deal).