Wednesday, June 04, 2003

WHY NOT ANTI-DILUTION PRICE PROTECTION? Last week I discussed anti-dilution price protection and suggested that there may be a time when an Investment Bank / Venture Capital firm or other investor would not want this protection written into the Certificate of Incorporation.

Consider this. You are a VC firm and you were one of 3 investors buying Series A stock. And you got some good anti-dilution price protection. But the company runs into the trouble and needs another infusion of money or its going under and all three Series A investors are going to lose their investments. No outsider wants to invest, so your VC firm decides that its time for the Preferred Shareholders to act to shore up the Company. Of course, you negotiate a lower pre-money valuation than the Series A round, so the Series B round will be a down round. But one of the Series A investors decides that it's not going to poney up some more bucks for the Series B. It figures that you'll put in enough money to protect yourself. Even worse, that other investor refuses to waive its anti-dilution protection.

So, now you're stepping up to the plate and the other investors aren't, but they suddenly get a nice healthy increase in their shares for sitting on their hands, freeloading on your generosity. So, if you enter with multiple parties in one round, consider whether they will be there for the Company in the bad years when deciding how the anti-dilution price protection is going to work.

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