The word “dilution” has several meanings in deal making; it is critical to understand the context. An investor in any given round of financing is concerned that the next round could be at a lower price per share than what he is paying this round. Therefore, the investor will insist upon anti-dilution protection.
If pressed for justification, the investor may explain that if the value of a company declines between rounds, management must be largely responsible. The investor maintains that he shouldn’t be penalized for management’s deficiencies. There are two common types of anti-dilution protection: full ratchet and weighted average. This post will examine full ratchet anti-dilution protection.
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