The most punitive anti dilution provision is a Full Ratchet.
By default, you see 3,000,000 shares for VC Firm A for their Series A investment. This was 1,000,000 shares before the anti dilution was triggered. Hover your mouse over the 3,000,000 shares to see the original and anti dilution shares. Now, do the following:
- Change the pre-money of Series B to $4,000,000 to remove the trigger of the anti dilution
- Now you see the $1.00/share that would be expected by a flat round.
- Change the pre-money of Series B back to $2,000,000 to see the anti dilution re-trigger, and read below for a complete description
The complexity around a full ratchet is based on the adjustment of the price while keeping the percent of the company the investor buys the same.
- With a $2M pre for Series B, VC Firm B agrees to buy 20% of the company for $500,000.
- This triggers the full ratchet of Series A.
- The Price Per Share of Series B is $0.50 ($2M pre/4,000,000 outstanding shares).
- Series A always gets the same price as Series B if it is less than $1.00/share.
- So, Series A investors are entitled to the 2,000,000 shares now with the $0.50/share price.
- The ratchet says that Series B is buying 20% of the company for $500,000.
- Therefore, with $2M pre/5,000,000 outstanding shares the PPS is now $0.40/share for Series B and therefore Series A.
- That increases the number of shares that Series A is owed, now 2,500,000 shares given the $0.50/share price.
- That again influences the PPS of Series B to maintain their 20% purchase, yielding $2M pre / 5,500,000 shares and PPS is $0.363636/share.
- This continues until the PPS of Series B is $0.333333/share and everything balances.
- 20% of the company with a $2M pre / 6,000,000 shares = $0.33333/share and the original $1M investment by VC Firm A yields an additional 2,000,000 shares above the original 1,000,000 shares to make them whole.
Other kinds of Anti Dilution
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