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.

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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. What does it signify about a company if there is a large difference between its EPS ...

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  4. Why is a company's diluted EPS always lower than its simple EPS?

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  5. What is the difference between earnings per share (EPS) and diluted EPS?

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