Deal Terms
Dilution Protection
Contractual mechanisms that protect investors from having their ownership percentage reduced by future issuances — primarily anti-dilution provisions and pro-rata rights.
Dilution protection encompasses the various contractual rights that shield investors from having their economic ownership reduced by future equity issuances. The main mechanisms: anti-dilution provisions (which adjust conversion prices in down rounds), pro-rata rights (which let investors maintain ownership by participating in future rounds), and full ratchet provisions (the most aggressive form of anti-dilution). Not all dilution is bad — if a company raises at a higher valuation and the investor's ownership percentage drops slightly but their shares are worth more, that's good dilution. Dilution protection mechanisms primarily matter in adverse scenarios: down rounds, bridge rounds with unfavorable terms, or large option pool increases.