What are Carveouts to Anti-Dilution?

Triggering anti-dilution protection can be detrimental to common shareholders, who are subject to dilution. As such, the common shareholder may attempt to negotiate barriers to triggering an anti-dilution provision (i.e., a change in the anti-dilution conversion ratio). 

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What are the Common CarveOuts?

Below are common carveouts to corporate actions that that will not trigger anti-dilution provisions:

• Converted Shares - Preferred shareholders converting their shares to common shares,
• Exercise of Options - Issuance of common shares pursuant to exercise of options, warrants, or other convertible securities,
• Stock Dividends - Issuance of common shares as a dividend to preferred shareholders,
• Division of Shares - Increased number of shares pursuant to a stock split,
• Employee Compensation - Common s `hares (or share equivalents) issued to individuals (such as employees or contractors) pursuant to a compensation or vesting schedule,
• Re-stated Certificate - Issuances make pursuant to an authorized amendment to articles of incorporation, such as a stock split or authorization of another class of shares,
• IPO - Shares issued pursuant to an IPO,
• Merger or Acquisition - Any shares issued pursuant to M&A or board-approved joint venture,
• Commercial Transactions - Shares issued as part of a board approved debt financing, commercial transaction, real property transactions,
• Settlements - Shares issued pursuant to any board-approved settlement,
• Board Approved Relations - Shares issued pursuant to board-approved strategic or operational aspects, such as R&D, technology license, or partnerships,
• Shares to Suppliers - Shares issued to suppliers as part of a board approved transaction,
• Majority Vote - Shares issued pursuant to approval of a majority of preferred shareholders.

The amount or number of common shares issued that will not trigger anti-dilution is typically limited to a specific number, board approval (majority or unanimous), or approval of a majority of preferred shareholders. Also, an amendment to the articles of incorporation pursuant to the bylaws can be used to avoid a trigger.

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