What is an Anti-Dilution Agreement Review?
An anti-dilution agreement is a document that protects early investors from ownership dilution in future financing rounds. It essentially clarifies how their share conversion prices will be adjusted if the company issues new shares at a lower price than what they paid.
Reviewing an anti-dilution agreement is essential to protect your interests.
Read the rest of this article to explore core terms that are usually found in an anti-dilution agreement, how to review it for accuracy, and how a qualified lawyer can help you.
What are Key Terms to Review in an Anti-Dilution Agreement?
While anti-dilution information can be found in a separate agreement, it sometimes takes the form of provisions in a contract. Generally, anti-dilution information usually contains the following key terms:
- Dilution. This specifies the reduction in investor percentage ownership when a company issues additional equity.
- Anti-dilution protection. This must be made clear as it protects an investor from the effects of future issuances.
- Triggers. Clarify that events which trigger anti-dilution protection are stated.
- Issuance price. Your agreement should specify the price per share in new financing.
- Definitions. It’s worth checking for, or including, a definitions section to clarify any terms that could confuse parties, such as “down round.”
What are Tips for Reviewing an Anti-Dilution Agreement?
It’s important to carefully review all anti-dilution provisions to prevent future challenges or disputes. Here are some things to consider.
Clarify the Anti-Dilution Type
There are two main types of anti-dilution clauses: full-ratchet and weighted average. You want to ensure the agreement provides clarity on which one applies.
Full-ratchet is considered more aggressive and can increase investor ownership during a down round, whereas a broad-based weighted average is advisable as it provides proportional protection.
Include a Play-to-Play Requirement
Adding this to your anti-dilution agreement requires investors to take part in a new financing round to maintain their anti-dilution protection. Should they not, they could forfeit those rights. Including this serves to protect the company.
Examine Exclusions
For clarity, the agreement should clearly define what isn’t being included in the anti-dilution protections, such as other transactions or circumstances.
Verify Duration
You should specify how long the protection will remain in effect and identify exactly when the anti-dilution rights terminate.
Compare the Agreement with Other Documents
It’s important to refer to other company documents, such as shareholder agreements, to ensure that there are no contradictions between them and anti-dilution agreements or clauses.
Consider Amendments
If the company wishes to modify any anti-dilution terms, the agreement should specify how they can do this and if the protected investor must provide their consent.
Do You Need a Legal Review of Your Anti-Dilution Agreement?
While you can review an anti-dilution agreement, it’s usually advisable to hire a lawyer to review it for you, especially if you’re worried about anything vague or unclear that could result in challenges.
A lawyer can help you by:
- Identifying the scope of protection. They will specify exactly which shares and investors are protected by the anti-dilution protection clauses.
- Checking which transactions are excluded. This might include employee share schemes and acquisitions.
- Considering all trigger events. They’ll confirm what events will activate the anti-dilution protection.
- Reviewing adjustments. To protect both parties, a lawyer will check how the investor’s rights can be adjusted.
- Verifying the duration and termination. Your lawyer will inform you of exactly when the protection takes effect, how long it will last, and what specific events result in the termination of rights.
- Comparing the document across other company documents. This flags and remedies any contradictory information that could create problems in future, such as by causing disputes.
- Considering consent. A lawyer will determine if the investor has any rights to approve or veto transactions that could trigger anti-dilution protection.
- Checking legal and regulatory compliance. A lawyer will confirm that all agreement provisions are consistent with the applicable company, securities, and other laws and regulations.
- Revising the agreement for clarity. To avoid any ambiguous language that can result in legal disputes, a lawyer will make any necessary changes to the document to protect your interests.
Where to Find a Lawyer for Your Anti-Dilution Agreement Review
Anti-dilution agreements can be complex, which is why hiring a lawyer to review them is beneficial. If you’re unsure of where to find a lawyer who’s experienced in contract drafting and review, use an online legal platform. These give you access to a network of lawyers who can assist you.
ContractsCounsel is one of the largest online legal marketplaces that connects you to a curated network of lawyers who have been vetted on the platform. You can find reputable and experienced lawyers to give you peace of mind that your agreement is clear and legally valid.
Here are the steps to follow when hiring a lawyer to review your anti-dilution agreement:
- Go to the ContractsCounsel marketplace.
- Select ‘One-time project’ and ‘Contract review.’
- Post your project for free.
- Include some details of what you require so you match with suitable lawyers, such as if there are specific clauses you’re concerned about.
- Wait for bids. You’ll receive multiple bids from lawyers on the platform who are ready to help you.
- Review the lawyer data. You can go through extensive lawyer information before selecting a lawyer to hire, such as regarding the lawyers’ location, expertise, credentials, and client ratings for previously completed projects on the platform.
- Choose a lawyer to hire. They’ll charge a flat fee for a review of the anti-dilution agreement.
