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Types of Anti-Dilution Provisions: Weighted Average -- Narrow-Based
The narrow-based weighted average formula would not include the convertible securities in (ii), only using the current outstanding securities.
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Types of Anti-Dilution Provisions: Full-Ratchet
Full-ratchet dilution protection gives investors the ability to recalibrate a per share purchase price downward to the price at which shares are sold in the next round of financing. As an example, assume the first-round investor paid $1 per share to own 10% of the company. In a later down round priced at $0.50 per share, the investor’s shares would be repriced to $0.50 per share. The investor wouldn’t receive additional shares of preferred stock, but the conversion rate would be adjusted to double the number of shares of common stock that the investor would receive if the investor were to convert the shares. This would ultimately increase the dilution on the common stockholders. This provision then allows the investor to maintain the ownership percentage in the company.
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Types of Anti-Dilution Provisions: Partial-Ratchet
Some investors will offer a derivative of the full-ratchet called a “partial ratchet,” including a “half ratchet” or “two-thirds ratchets.” The concept is similar to a full ratchet, but will have less of an impact on the common holders. However, these provisions are fairly uncommon.
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What type of anti-dilution formula should I expect?
None Series A 6% Series B 5% Series C 5% Series D 5%
Broad-based weighted average Series A 83% Series B 85% Series C 80% Series D 77%
Narrow-based weighted average Series A 3% Series B 3% Series C 6% Series D 2%
Ratchet Series A 8% Series B 7% Series C 9% Series D 16%
Source: Private Company Financing Report, Cooley Godward Kronish LLP, April 2006 (based on financing transactions in 2004-2005)
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