There are two fundamental types of anti-dilution: the full slide or weighted average price mechanisms, depending on whether they are more favorable to the diluted investor or ordinary shareholders. A complete ratchet determination ensures that current investors are able to retain their ownership percentage when a company offers additional shares. A full ratchet also offers cost protection if the pricing of future cycles is lower than that of the first round. Dilution protection is a term that is present in almost all installation transactions. From the point of view of the founders, especially in the case of a start-up or an early-stage company, it is very important to understand the implications of such a provision in the shareholder agreement (SHA). Founders generally tend to accept so-called “standard” terms in the SHA when they have an urgent need for investment. An anti-dilution provision should be carefully reviewed to ensure that it is not too harsh for the founders and that the transaction documents set precedents for the subsequent investment cycle. This article discusses some of the main methods of dilution protection typically found in transactions in India and some of the challenges associated with the effective implementation of these anti-dilution provisions. Then, the ratchets or anti-dilution mechanisms defined by the shareholders` agreement come into play to protect the preferred Investor of series A from this reduction. But how do anti-dilution mechanisms work and what types of compensatory pups can be agreed? When a company provides new equity, existing managers/investors have the option to retain proportional ownership of the company. This objective is achieved through an anti-dilution clause that protects the investor against a reduction in the percentage of ownership of a company due to the future issuance by the company of additional shares in other companies.

A ratchet requires a clear definition of the triggering event as well as the date and method of payment. When a ratchet is established, it is important to limit the maximum claim of the managers by tying the amount to be paid to a maximum percentage of participation. As a rule, those who own a fixed number of common shares undergo considerable dilution as a result of the implementation of a ratchet. The term “full slide” refers to a contractual provision intended to protect the interests of previous investors. In particular, it is an anti-dilution provision where, for all common shares sold by a company after the issuance of an option (or converted value), the lower selling price is considered an adjusted option price or conversion ratio for existing shareholders. Guarantee and exemption insurance in sales contracts has become an alternative to the guarantees that the seller traditionally grants to the buyer to satisfy potentials. Dilution usually occurs during the second or third round of capital raising. The anti-dilution clause protects investors from dilution when the company issues new shares at a lower price than originally paid.

Anti-dilution clauses can take two main forms – they can be either full or weighted average ratchets. When setting up a company in the United States, some partners may request the introduction of an anti-dilution clause in the shareholders` agreement. This clause can sometimes be detrimental to existing shareholders when raising capital. This is why it is important to understand the mechanism of the anti-dilution clause in the shareholders` agreement. In order to depreciate before the risk of a downturn, institutional investors often require that anti-dilution provisions be included in the shareholders` agreement in order to compensate for the theoretical depreciation of their shares following a devaluation. . . .