Antidilution Nuances to Ignore
There are a lot of little nuances that can come up in connection with term sheet negotiations. One of my clients recently brought one of the more irrational ones to my attention with a question about what is and what is not fully diluted. It began with the cap table where the option pool first appears. When determining their investment and the pre and post money valuation, the investors assume the issuance in full of the entire option pool. Just to be clear, if the investors want 50% of the company, they mean after all options in the pool have been granted. (So, if you imagine...
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Weighted Average Antidilution
With new rounds getting harder and harder to do and with valuations going down, certain preferred stock terms are taking on more significance than they normally do. Weighted average antidilution is one of those terms. It is so standard that very little thought is ever given to it. The effect of the antidilution provision is to disproportionately shift some of financial dilution to the common stockholders. It is pointless to argue about the intellectual underpinnings of this practice, because the practice is universal among venture investors. Having said that, you need to understand how the weighted average antidulition formula works....
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