Term Sheet - Anti-Dilution

this was one of the tougher term sheet items to figure out when I first started, it requires some math and has more than a few moving parts. I don't see many full ratchets these days but let me tell you, back in '01-'03 they were standard which gives you some indication to the severity of the term. It's also really uncommon to see a narrow-based antidilution provisions, so what is most common today is a broad-based weighted average antidilution provision.

Link: Term Sheet - Anti-Dilution.

It has been a while since I put up a term sheet post so I thought I’d tackle a hard one today. While it’s fun to tease lawyers about math (and – actually – about anything), my co-author on this series Jason Mendelson (a lawyer) often reminds me that lawyers can do basic arithmetic (and occasionally have to resort to algebra). The anti-dilution provision demonstrates this point.

Traditionally, the anti-dilution provision is used to protect investors in the event a company issues equity at a lower valuation then in previous financing rounds. There are two varieties: weighted average anti-dilution and ratchet based anti-dilution. Standard language is as follows:

Anti-dilution Provisions

Full ratchet means that if the company issues shares at a price lower than the Series A, then the Series A price is effectively reduced to the price of the new issuance. One can get creative and do "partial ratchets" (such as "half ratchets" or "two-thirds ratchets") which are a less harsh, but rarely seen.

While full ratchets came into vogue in the 2001 – 2003 time frame when down-rounds were all the rage, the most common anti-dilution provision is based on the weighted average concept, which takes into a