Dilution Protection

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.

BREAKING DOWN '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. Anti-Dilution Provision

    A provision in an option or a convertible security. It protects ...
  2. Full Ratchet

    An anti-dilution provision that, for any shares of common stock ...
  3. Dilution

    A reduction in the ownership percentage of a share of stock caused ...
  4. Antidilutive

    A term describing the effects of securities retirement, securities ...
  5. Broad-Based Weighted Average

    An anti-dilution provision used for the benefit of existing preferred ...
  6. Diluted Earnings Per Share - Diluted ...

    Diluted Earnings Per Share (or Diluted EPS) is a performance ...
Related Articles
  1. Professionals

    Dilution

    Dilution can drastically impact the value of your portfolio.
  2. Forex Education

    The Dangers Of Share Dilution

    Investors need to be aware of the existence of dilutive securities and how they can affect existing shareholders.
  3. Investing Basics

    The Dangers Of Share Dilution

    Share dilution reduces the value of an individual investment and can drastically impact a portfolio.
  4. Professionals

    Dilutive Securities

    CFA Level 1 - Dilutive Securities. This topic explains how dilutive securities affect shares outstanding. Shows how to determine if a security is dilutive or anti-dilutive.
  5. Investing Basics

    How Does Dilution Work?

    Dilution refers to the reduction in the percentage equity ownership of a company due to additional equity being issued to other owners.
  6. Active Trading

    Mistake No.4 - Forgetting About Dilution

    Issuing shares can dilute the shares outstanding. Don't make the mistake of missing this key statistic.
  7. Fundamental Analysis

    Calculating Basic Earnings Per Share

    Basics earnings per share measures the amount of net income earned per share of outstanding stock.
  8. Professionals

    Calculating Basic and Fully Diluted EPS in a Complex Capital Structure

    CFA Level 1 - Calculating Basic and Fully Diluted EPS in a Complex Capital Structure. Learn how to calculate a fully diluted EPS in a complex capital structure. Explains how to incorporate convertible ...
  9. Professionals

    New Equity Sales

    A company that has already held an IPO can sell new equity in what is known as a secondary offering.
  10. Bonds & Fixed Income

    ESOs: Accounting For Employee Stock Options

    By David Harper Relevance above ReliabilityWe will not revisit the heated debate over whether companies should "expense" employee stock options. However, we should establish two things. First, ...
RELATED FAQS
  1. What are the differences between dilutive securities and antidilutive securities?

    Learn how investors and accountants apply the terms "dilutive" and "antidilutive" to securities or the exercise of security ... Read 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 Answer >>
  3. Why is a company's diluted EPS always lower than its simple EPS?

    Learn about diluted and basic earnings per share and why a company's diluted earnings per share is usually lower than its ... Read Answer >>
  4. Why should investors consider the fully diluted share amount?

    Learn about the importance of considering the fully diluted shares, how it could affect a stock's share price and how dilution ... Read Answer >>
  5. What does it signify about a company if there is a large difference between its EPS ...

    Learn more about basic earnings per share and diluted earnings per share, what the ratios measure and what a large discrepancy ... Read Answer >>
  6. What's the difference between basic shares and fully diluted shares?

    Find out more about basic outstanding shares, fully diluted shares, the difference between the calculation of shares and ... Read Answer >>
Hot Definitions
  1. Goodwill

    An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company ...
  2. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  3. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  4. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center