Provisions in the original stock terms indicate that if more shares of common or preferred stock are offered at a cost of less than $10 per share, the Series A investors can convert preferred stock shares to common stock shares at the lower price, thus increasing their percentage of holdings.If the company later makes an initial public offering (IPO), the shareholders who purchased Series A stock shares could convert preferred stock to common stock on a one-to-one basis.A company offers an initial round of preferred stock, Series A, at $10 per share.Here's how this price protection strategy works: How Full-Ratchet Anti-Dilution Worksįull-ratchet anti-dilution is often included in preferred stock terms for new investors. Many investors also want to maintain their current percentage as the company grows, which can increase their eventual return on investment when share values rise. This is important if an investor will lose voting rights with a new stock offering because he or she will fall below this percentage.
Some companies require investors to hold a certain percentage of existing shares to maintain preferred rights. This also allows an original investor to maintain the current ownership stake without investing additional funds in the company. The full-ratchet strategy also provides cost protection if a new round of financing is offered at a higher price than the initial round of financing. With full-ratchet anti-dilution, this individual can convert existing shares to the $2.50 price, thus doubling the number of shares held and preserving his or her ownership stake from dilution by the new stock offering. If an investor originally paid $5 per share for a 20 percent stake in the company and new financing is released at $2.50 a share, he or she would have to purchase additional shares to maintain the current ownership stake. This lets shareholders maintain the same ownership percentage as they had with the initial investment. Michael Spence,A.M.Full-ratchet anti-dilution refers to a provision in which the lowest sale price is applied to common stock shares a company sells after issuing a convertible security or option as the conversion ration or adjusted option price for current shareholders. A,A Priori Probability,A Round Financing,A+/A1,A-/A3,A-B Split,A-B Trust,A-Credit,A-Note,A-Share,A-Shares,A.
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