Dilution Protection

AAA

DEFINITION of 'Dilution Protection'

A provision that seeks to protect existing shareholders or investors in a company from a decrease in their ownership position. The dilution protection feature kicks in if the actions of the company will decrease the stakeholders' percentage claim on assets of the company. Dilution protection provisions are generally found in venture capital funding agreements.


Also known as anti-dilution protection.

INVESTOPEDIA EXPLAINS 'Dilution Protection'

The most common form of dilution protection protects convertible stock or other convertible securities in the company. In the event the company sells more shares at a lower price, the dilution protection provision will make a downward adjustment in the conversion price of the convertible securities, so that upon conversion existing investors receive more shares of the company, thereby retaining their ownership stake. Dilution protection provisions are classified in two categories - full ratchet anti-dilution and weighted average anti-dilution.

RELATED TERMS
  1. Convertible Preferred Stock

    Preferred stock that includes an option for the holder to convert ...
  2. Diluted Earnings Per Share - Diluted ...

    A performance metric used to gauge the quality of a company's ...
  3. Anti-Dilution Provision

    A provision in an option or a convertible security. It protects ...
  4. Dilution

    A reduction in the ownership percentage of a share of stock caused ...
  5. Full Ratchet

    An anti-dilution provision that, for any shares of common stock ...
  6. Broad-Based Weighted Average Ratchet

    A mechanism seen in early-stage, pre-public companies in response ...
RELATED FAQS
  1. Where does the stock come from when convertible bonds are converted to stock?

    First, let's define convertible bonds. A unique combination of debt and equity, they provide investors with the chance to ... Read Full Answer >>
  2. What is dilutive stock?

    Dilutive stock is any security that dilutes the ownership percentage of current shareholders - that is, any security that ... Read Full Answer >>
  3. Who are Berkshire Hathaway's (BRK.A) main competitors?

    Led by renowned investor Warren Buffett, Berkshire Hathaway (BRK.A) is involved with multiple sectors of industry, facing ... Read Full Answer >>
  4. How does debt affect a company's beta?

    The average debt/equity ratio for the Internet sector is small, at 0.32 for the first quarter of 2015, and an average of ... Read Full Answer >>
  5. How does a company decide whether it wants to engage in a leveraged buyout of another ...

    A company may decide to undertake a leveraged buyout of another company if it believes it can reorganize the target company ... Read Full Answer >>
  6. What factors are most important to mezzanine financiers?

    Mezzanine financing is used as a bridge in capital funding between senior debt provided by conventional financial institutions ... Read Full Answer >>
Related Articles
  1. Options & Futures

    The "True" Cost Of Stock Options

    Perhaps the real cost of employee stock options is already accounted for in the expense of buyback programs.
  2. Bonds & Fixed Income

    Convertible Bonds: Pros And Cons For Companies And Investors

    Find out why businesses choose this type of financing and what effect this has on investors.
  3. Fundamental Analysis

    Accretion / Dilution Analysis: A Merger Mystery

    This analysis tool is an effective way to value mergers and acquisitions. The deal's on the table, but should you sign the papers?
  4. Professionals

    A Look at How the Ultra-Wealthy Invest

    Ultra-wealthy investors are cautious this year as they approach the markets. Many target mutual funds and stocks, but most also diversify their portfolios.
  5. Investing News

    Germany: Creating Climate For Tech Sector To Grow

    Many German companies, which are eager to catch up with the rest of the world by entering the digital age, are investing in tech startups.
  6. Professionals

    Due Diligence Tips for Investing in Alternatives

    Alternative investments can provide unique benefits to clients for whom they are suitable. But do your due diligence and beware of the risks.
  7. Investing

    Africa's Rapid Tech Advancement Drawing Investors

    The rapid adoption of technology, and the proliferation of startups, in Africa have created excellent investment opportunities.
  8. Brokers

    Private Equity's Returns Are Tempered By Its Risks

    Private equity firms adopt approaches to quickly hike up earnings and boost returns, but these investments come with big risks too.
  9. Entrepreneurship

    The Risk And Rewards Of Investing In Startups

    Investing in startups is a very risky business but can reward investors greatly if and when they do pay off.
  10. Investing

    Top Alternative Investments To The Stock Market

    Dislike the stock market or want greater diversity? Here are some alternatives.

You May Also Like

Hot Definitions
  1. Fracking

    A slang term for hydraulic fracturing. Fracking refers to the procedure of creating fractures in rocks and rock formations ...
  2. Mixed Economic System

    An economic system that features characteristics of both capitalism and socialism.
  3. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  4. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  5. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  6. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
Trading Center