How Do The Series A Anti-Dilution Rights Work?
The adjustment is a change in the rate at which the Series A converts into common stock. The above example assumes a weighted-average adjustment under the Series A documents. Under a weighted-average adjustment, the Series A adjusts into a greater number of shares of common stock, determined based on the assumption that all of the existing equity of the Company is worth the old Series A price, and that the new equity (the Series B) is worth what is being paid for it. In our example, the Series A “conversion price” is reduced from $1 to about 49 cents. As you can see, the Series A still faces significant dilution, but not as severe as the dilution would have been absent the adjustment. Some convertible preferred stock may provide for full ratchet adjustment, under which the conversion price is reduced to the price paid by the new investors. In our example, a full ratchet adjustment would not work, based on the numbers, as it would not be possible to give the Series B investors half of t
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