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.