How to Protect Your Company from Anti-Dilutions

What is anti-dilution?

Well, this has to do with the shares of your company’s equity or your company’s net worth. As mentioned before, when an investor invests money in your company, he is buying some of your company’s equity.

This means that you will have to dilute some of the shares of your company stock. For example, you begin a company together with a couple of other partners, you and your partners own shares in the company stock.

If you and three other partners cofound a company divide your company’s stock into one hundred shares each share then represents 1% of the company stock. This means that if you divided your company stock equally amongst yourselves, all four of you should hold 25% of the company’s stock each.

Now, however, the investor steps in, and he also wants some company stock, so you need to dilute your shares.

This means that 100 shares equaling 100% of the company stock can no longer be applicable. You and your cofounders currently own 25% of the company stock each, but your investor will also want 25% of the company stock, so how can you correct this problem?

Simple, you need to dilute your shares and instead of the company stock being divided into 100 shares you will need to divide the company stock into 150 shares.

You and your cofounders may still have 25 shares each, but you no longer own 25% of the company stock.

The shares have been diluted in order to accommodate the investor’s condition, and the investor gets his share in the company shares.

This basically means instead of each owning a quarter of the company stock, you and your cofounders would own one-sixth of the company stock each and the investor would own two sixths of the company stock.

 This is because now, instead of 100 shares in the company, you have 150 and each stock has been diluted, and one share is no longer one percent of the company stock. Now, you do not want to dilute the stocks too much, since the more investors you have come on board, the more the stocks will have to be diluted.

Should a strategic corporate investor want to come on board, you should be able to protect yourself from anti-dilution.

Anti-dilution basically means that the investor dictates the shares in the company not be diluted, hence preventing new investors from having their share in the company stock.