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Explain the anti-dilution clause in the term sheet
Anti-dilution is used by VCs to protect them from dilution in case of new equity being raised comes in at lower valuation. Mechanism/formula is set up in such a way to ensure that there is retrospective adjustment for the share price, so that investors get more shares as if they had invested at subsequent, lower priced round.
There are two types of antidilution:
Full ratchet antidilution
• In a down round, a full ratchet antidilution sees all previous rounds priced effectively at the new lower price.
• In full ratchet clause if one share is sold for a lower price then all previous shares of the VC will be repriced at the lower price.
• Was in full vogue after the internet bubble crashed post 2001.
Weighted average antidilution is of two types
• Narrow based antidilution– Investors share price is adjusted down only to some proportion of the new round depending on some pre-determined formula which considers the amount of new investment
• Broad based antidilution – Reduces the share price slightly lesser than narrow based