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An anti-dilution clause is a provision in an investment agreement that protects investors from dilution of their equity stake if the company issues shares at a lower price than what the investors originally paid.
There are two primary types of anti-dilution protections: full-ratchet and weighted average. Full-ratchet anti-dilution gives investors the right to convert their preferred shares into a greater number of common shares if any shares are issued at a lower price in the future. Weighted average anti-dilution adjusts the conversion rate based on the lower price and the amount of new shares issued. While these protections are beneficial for investors, they can be detrimental to founders and employees by diluting their equity in the company.
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