What is antidilution protection?
Antidilution provisions are used to preserve the economic value and voting interest of preferred stock (at the expense of the holders of common stock) in the event of issuances of additional shares of stock at a lower price per share than that paid by the holder of preferred stock. This protection is accomplished by increasing the rate at which the preferred stock converts into common stock. Convertible preferred stock is typically convertible into common stock at a ratio, the “conversion ratio,” determined by dividing the purchase price of the stock by the “conversion price,” which is initially the same as the purchase price. An anti-dilution adjustment is effected by reducing the conversion price, thereby causing an increase in the conversion ratio and, accordingly, the number of shares of common stock into which the preferred stock is convertible. There are two main types of antidilution protection, “weighted average” and “full ratchet.” The most common (and the most favorable to a
