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Anti-Dilution Rights in shareholder’s agreement

What does Anti-Dilution Right mean?

Anti-dilution right means a right vested with the investor through which the investor tends to retain his stake in the company, irrespective of changes to the capital structure of the company which is unfavorable to the investor.

What does Anti-Dilution Right stipulate?

Under this clause, the investor would seek the following two types of anti-dilution protection:

a)Dilution due to price differential

The investor would stake that if after raising funds from him, the company raises money from someone else and the price per share of the subsequent fund raise is lower than the price at which the investor subscribed, the investor would be entitled to an anti-dilution protection for his shares.

By doing this, the investor comes at par with the new investors in terms of the valuation at which the investment is made.

The investor may provide for certain exceptions to this right, for example, if such the shares are subscribed at a lower price under an ESOP scheme etc.

b) Dilution due to differential rights

Under this clause, the investor would stake that if after raising funds from him, the company raises money from someone else and the rights offered to such third-party is in excess of the rights provided to him, such additional rights shall automatically vest for the shares held by him.

By doing this, the investor protects the rights which are vested on his shares and ensures that those rights are not diluted pursuant to a new fund raise.

This post is part of our Founder’s handbook – “Negotiating Shareholder’s Agreement”, a comprehensive handbook for founders to negotiate shareholder’s agreement. Click here to download the complete handbook.

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