Need to know how to calculate what Weighted Average Anti-Dilution Protection means for startup shareholders? Check out our handy formula and calculator.
With Weighted Average Anti-Dilution Protection, the existing investors get diluted somewhat in accordance with a formula set out in the legal documents for the financing round. That formula is almost always as follows:
CP2 = CP1 * (A+B) / (A+C)
CP2 = Conversion price immediately after new issue
CP1 = Conversion price immediately before new issue
A = Number of shares of common stock deemed outstanding immediately before new issue
B = Total consideration received by company with respect to new issue divided by CP1
C = Number of new shares of stock issued
For example, imagine a company with 1 million common shares that issues 1 million preferred shares in a series A round. These are convertible at a rate of 1:1, pieced at $1.00 each.
In a Series B round, growth targets haven't been achieved and the company is valued down, issuing shares at a price of $0.50. Using a Weighted Average with the above formula, Series A preferred shares would be convertible into 1.2 common shares, instead of 2 common shares with a Full Ratchet.
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