Startup Law Videos - Key elements in a legal startup term sheet [Part 3]

Dilution refers to the phenomenon of a shareholder’s ownership percentage in a company decreasing because of an increase in the number of outstanding shares, leaving the shareholder with a smaller piece of the corporate pie. 

The total number of outstanding shares can increase for any number of reasons, such as the issuance of new shares to raise equity capital or the exercise of stock options or warrants. 
An anti-dilution clause is a provision in an option or a convertible security. It protects an investor from dilution resulting from later issues of stock at a lower price than the investor originally paid. Also known as an "anti-dilution provision."

What the investor would be looking for is a "full ratchet provision". A full ratchet provision is the simplest type of anti-dilution provision but it is the most burdensome on the common stockholders and it can have significant negative effects on later stock issuances. Full ratchet works by simply reducing the conversion price of the existing preferred to the price at which new shares are issued in a later round. 

Advocate Dhruv Suri can be consulted for further information at http://lawrato.com/advocate-dhruv-suri or by calling 09599-000-555.