Understanding the Antidilution Provision: A Key Investor Protection

Q: How does an antidilution provision work?

It adjusts the conversion ratio of convertible securities to ensure that investors maintain their value when new shares are issued.

Q: Do all convertible securities have antidilution provisions?

No, these provisions must be explicitly included in the investment agreement or charter.

Definition & Meaning

An antidilution provision is a clause in convertible securities that protects investors from losing value in their investment due to the issuance of new shares at a lower price than what they originally paid. This provision ensures that the conversion ratio, which determines how many common shares an investor receives upon conversion, remains favorable despite changes in the company's stock structure, such as share splits or dividends. It is important for these provisions to be explicitly stated in a corporation's charter to be enforceable in most jurisdictions.

Table of content

Legal Use & context

Antidilution provisions are primarily used in the context of corporate law, especially in securities and investment agreements. They are essential for protecting investors in venture capital and private equity transactions. These provisions can be included in various legal documents, such as stock purchase agreements and convertible notes. Users can manage these agreements themselves by utilizing legal templates provided by services like US Legal Forms, which are drafted by experienced attorneys.

Key legal elements

Real-world examples

Here are a couple of examples of abatement:

Example 1: A startup issues convertible notes to investors at a price of $10 per share. Later, the startup issues new shares at $5 per share. The antidilution provision allows the original investors to adjust their conversion ratio to ensure they still receive a fair number of shares based on the new lower price.

Example 2: A company undergoes a stock split, doubling the number of shares outstanding. The antidilution provision ensures that the conversion ratio for existing convertible securities is adjusted accordingly, protecting the investors' interests. (hypothetical example)

State-by-state differences

State	Key Differences
California	Antidilution provisions are commonly enforced and often included in venture capital agreements.
Delaware	Delaware law emphasizes the need for clear language in the charter regarding antidilution provisions.

This is not a complete list. State laws vary and users should consult local rules for specific guidance.

Comparison with related terms

Term	Definition	Key Differences
Antidilution Provision	A clause protecting investors from dilution of their shares.	Specifically addresses conversion ratios in convertible securities.
Preemptive Rights	The right of existing shareholders to purchase additional shares before the company offers them to others.	Focuses on maintaining ownership percentage rather than conversion ratios.

Common misunderstandings

What to do if this term applies to you

If you are an investor concerned about dilution in your convertible securities, review the terms of your investment agreement to see if an antidilution provision is included. If it is not, consider discussing this with your legal advisor. You can also explore US Legal Forms for templates that can help you draft or amend your agreements to include necessary protections. In complex situations, seeking professional legal assistance may be beneficial.

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Quick facts

Antidilution provisions protect against dilution from new stock issuances.
They must be clearly stated in the corporation's charter to be enforceable.
Commonly used in venture capital and private equity agreements.

Key takeaways

Frequently asked questions

What is an antidilution provision?

It is a clause in convertible securities that protects investors from dilution of their shares due to new stock issuances at a lower price.