Contact Us

If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.

Please fill out the contact form below and we will reply as soon as possible.

  • Courses
  • Tutoring
  • Home
  • Law, Transactions, & Risk Management
  • Business Transactions, Antitrust, & Securities Law

Weighted Average Anti-dilution Protection - Explained

What is Weighted-Average Anti-dilution Protection?

Written by Jason Gordon

Updated at April 15th, 2022

Contact Us

If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.

Please fill out the contact form below and we will reply as soon as possible.

  • Marketing, Advertising, Sales & PR
    Principles of Marketing Sales Advertising Public Relations SEO, Social Media, Direct Marketing
  • Accounting, Taxation, and Reporting
    Managerial & Financial Accounting & Reporting Business Taxation
  • Professionalism & Career Development
  • Law, Transactions, & Risk Management
    Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
  • Business Management & Operations
    Operations, Project, & Supply Chain Management Strategy, Entrepreneurship, & Innovation Business Ethics & Social Responsibility Global Business, International Law & Relations Business Communications & Negotiation Management, Leadership, & Organizational Behavior
  • Economics, Finance, & Analytics
    Economic Analysis & Monetary Policy Research, Quantitative Analysis, & Decision Science Investments, Trading, and Financial Markets Banking, Lending, and Credit Industry Business Finance, Personal Finance, and Valuation Principles
  • Courses
+ More

Table of Contents

What is Weighted Average Anti-Dilution?

What is Weighted Average Anti-Dilution?

The most common anti-dilution protection is called weighted-average, anti-dilution protection. This approach employs a formulation adjust the rate at which preferred stock converts into common stock, based upon:

  • the amount of money previously raised by the company,
  • the price per share at which it was raised,
  • the amount of money being raised by the company in the subsequent dilutive financing, and
  • the price per share at which such new money is being raised.

The weighted-average price (which will always be lower than the original purchase price following a dilutive financing) is then divided into the original purchase price in order to determine the number of shares of common stock into which each share of preferred stock is then convertible. 

Back to: Entrepreneurship

This formula derives a new, reduced conversion price for the preferred stock. The result is an increased conversion ratio for the preferred stock. If new stock is issued at a price per share lower than the current conversion price for a particular series of preferred stock (a down round), the conversion price of the preferred series will be calculated by the following formula:

AP = OP x (CO + NCE) / (CO + CE)

AP = New or Adjusted Conversion Price OP = Original Conversion Price of Preferred Shares CO = Common stock Outstanding Pre-deal CE = Value of Common Equivalent of Preferred Shared NCE = Value of Common Equivalent in the New Issuance   Company A has 100 common shares and issues 100 preferred shares in a Series A financing at $1.00. 

As discussed in previous lectures, the preferred price matches the common stock price at the time, so the conversion ratio is 1:1 at the time. In a series B round the company issues 100 shares at $.50. The weighted-average, anti-dilution provision would offer protection to the series A preferred shareholders by adjusting the conversion price (the AP). To calculation the AP, lets plug in the above formula. OP = The original conversion price was $1.00 CO = The common outstanding in the simple scenario equals 100. CE = The common equivalent of the preferred shares is the $100 (100 x $1) NCE = The common equivalent of the preferred shares is $50 (100 x $.5)

AP = $1.00 x (100 + 50 / 100 +100) = $.75

Back to: LAW, RISK, and TRANSACTIONS
Back to: Business Transactions
weighted average anti-dilution antidilution protection

Was this article helpful?

Yes
No

Related Articles

  • Securities Registration Exemption - Section 3b - Explained
  • What are Securities Laws?
  • Strategic Buyer - Explained
  • Subscription Agreement - Explained



©2011-2023. The Business Professor, LLC.
  • Privacy

  • Questions

Definition by Author

0
0
Expand