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How important are antidilution adjustment provisions in venture financing agreements for below-conversion price issuances of new stock?
Typically, these provisions are designed to protect the value of the preferred stock by applying a weighted average adjustment that factors in both the number of new shares and their issuance price to increase proportionately the shares issuable upon conversion. Alternatively, a full ratchet adjustment may be used that lowers the conversion price to the new stock issuance price, regardless of how many new shares are issued. Because this approach in the event of a down round, results in a larger number of conversion shares becoming issuable, you should resist it.
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