Tuesday , 24 October 2017

Should An Entrepreneur Give Anti-Dilution Protection to Seed Investors?

Every business on earth requires some sort of investment be it from the entrepreneur’s own pockets or from an investor.  Generally, most of the entrepreneurs do not have sufficient fund to channelize into business and thereby they depend on an investor, who is an angel to him and his business. Seed Investors ??? Yes, You heard it right..!!! Seed investors are those who make an effort to invest into the business at an early stage, he tends to support the business till it generates its own cash. The seed investors are also termed as “Believers” as they believe in the idea and raw stage of the business to bud and progress in a good way.

Why Do The Seed Investors Ask For Anti- Dilution Protection ?

Anti- Dilution Protection ? What does that mean ? The term anti- dilution protection refers to a kind of protection served in the case of dilution, where the sale of shares and stock generally happen at a lower price. The nature of dilution is linked with the ownership deed and benefits one derives after the commencement of dilution action. This is why, some seed investor demand to acquire the anti- dilution protection rights add into the contract. But, being an entrepreneur, you should be aware that such rights are not intact with the market as well as practical applicable in the business chores.

But then, there are some entrepreneur who decides to act on such provision, but the problem here would be the entrepreneur will have to face the tragic situation in the next financing round. And above all the second investor in line would definitely be not ready to face the dilution hit of the first investor. Thereby the only better option is to imply the anti- dilution protection clause from the next financing round.

Should An Entrepreneur Give Anti-Dilution Protection to Seed Investors

Should The Entrepreneur Give Anti- Dilution Protection To The Seed Investors ?

Though some of the seed investors demand dilution protection. But, being an entrepreneur, he should make a wise choice with respect to the decision of giving. Because it would be him who would get ultimately affected.

  • One way to provide comfort to your investor’s investment is with the help of “Weighted average anti- dilution protection”. This formula or method would help an entrepreneur adjust the rate at which a preferred stock is converted into the common stock. Thereby yielding you a lower conversion price. You can make use of this technique if you desire to give protection.
  • You can also make the investor a counter offer to participate in the future rounds on a pro- rata basis. This will allow him to maintain a balance in the future rounds. But, then he will have to invest in the subsequent rounds.

Therefore, before making any kind of decision just make sure you understand the investor’s requirement and act accordingly. Check whether they intend to save the ownership rights or control right or seek protection against dilution or he is ready to invest in the future round. Understand the point to make a fortunate decision.

Apart from that it totally depends on the investor’s, type of investment, the nature of the business and the business protocol regarding the protection rights.Because a total “NO” would be a foolish act.

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