{"id":4106,"date":"2025-05-16T16:11:17","date_gmt":"2025-05-16T14:11:17","guid":{"rendered":"https:\/\/www.crccdlex.com\/?p=4106"},"modified":"2025-05-16T16:23:57","modified_gmt":"2025-05-16T14:23:57","slug":"anti-dilution-clauses","status":"publish","type":"post","link":"https:\/\/www.crccdlex.com\/en\/anti-dilution-clauses\/","title":{"rendered":"Anti-dilution clauses"},"content":{"rendered":"

Introduction<\/h3>\n

Investors willing to invest in a startup<\/i>‘s equity <\/i>assume that the company’s valuation will go up over time.<\/p>\n

But it is not automatic: the risk of so-called down rounds <\/i><\/b>is always around the corner.<\/p>\n

How can investors be protected? <\/b><\/p>\n

With anti-dilution clauses <\/b>typically present from the term sheet of <\/i>the transaction.<\/p>\n

What are the anti-dilution clauses for?<\/h3>\n

Such clauses aim protecting the investor from the risk of dilution of its investment in the startup<\/p>\n

When?<\/strong><\/p>\n

In the context of so-called down rounds. These are the start-up’s capital increases following the investor’s entry round, which are offered with a subscription price of new shares based on a lower valuation than the investor’s investment in the previous round<\/p>\n

In all cases?<\/strong><\/p>\n

Typically, anti-dilutive clauses do not apply in capital increases mandated by law, those implementing stock option plans, those issued upon merger in lieu of cash<\/p>\n

How do anti-dilution clauses operate?<\/h3>\n

By way of an allocation of certain amount of shares to the protected investor for free or against payment of a minimal amount to compensate for the dilutive effect suffered.<\/p>\n

The prejudice of dilution is transferred in whole or in part to the other shareholders other than the investor protected by the anti-dilution clause.<\/p>\n

How to determine the number of shares to be allocated to the protected investor?<\/h3>\n

There are two main calculation mechanisms:<\/p>\n

    \n
  1. Full ratchet method<\/li>\n
  2. Weighted average method<\/li>\n<\/ol>\n

    The fuller ratchet method<\/h3>\n

    Principle:\u00a0<\/em><\/p>\n

    To the protected shareholder are allocated an additional number of shares such that it obtains that greater shareholding in the capital stock that it would have obtained if the pre-money <\/i>valuation (on the basis of which the capital increase he or she subscribed to was resolved) had corresponded to the valuation at the lower <\/i><\/b>pre-money <\/i>placed on the basis of the down round.<\/i><\/p>\n

    Example:<\/em><\/p>\n

    Subscription price of the units of the protected investor capital increase round<\/i>: 10 euros each.<\/p>\n

    Subscription price of the down round <\/i>shares: 5 euros each.<\/p>\n

    The protected investor who purchased 1,000 shares at 10 euros each through the Full Ratchet clause can benefit from an additional 1,000 shares (for free or for token value) by adjusting his purchase price to 5 euros.<\/p>\n

    The weighted average method<\/h3>\n

    Principle:\u00a0<\/em><\/p>\n

    To the protected shareholder are allocated a number of shares such that it obtains that greater shareholding which it would have obtained if the pre-money <\/i>valuation (on the basis of which the capital increase subscribed to was resolved) had corresponded to the weighted average <\/u>between (i) <\/i>that pre<\/i>-money <\/i>valuation and (ii) <\/i>the valuation underlying the down round<\/i>.<\/p>\n

    The weighted average <\/i>system is distinguished into narrow-based <\/i><\/u>(where only units already issued and outstanding are taken into account) and broad-based <\/i><\/u>(where existing but not yet exercised options and conversions are also taken into account).<\/p>\n

    Example:<\/em><\/p>\n

    \"\"<\/p>\n

    Where:<\/i><\/p>\n

    Old <\/i>Conversion Price: the Subscription Price of the investor’s entry capital increase<\/i><\/p>\n

    Outstanding Shares Before Financing: the number of existing shares\/shares before the new round<\/i><\/p>\n

    Consideration Received: <\/i>the amount of <\/i>the down round<\/i><\/p>\n

    New Price per Share: the Price per share\/share of the down round<\/i><\/p>\n

    New Shares <\/i>Issued<\/i>: the number of shares\/units issued with the down round<\/i><\/p>\n

    How to legally attribute anti-dilution protections<\/h3>\n

    The a<\/b>nti-<\/b>dilution<\/b> protection<\/b>, is generally included in the by-laws of the company. In this case, it can:<\/p>\n