Anti-dilution Provisions

An anti-dilution provision prevents the Company from diluting Investors by issuing additional stock. If the Company were to sell additional stock at a price lower than the initial Investor paid, the Investor could convert their Preferred Stock to Common Stock for a price higher than the reduced sale price. This has the effect of protecting the overall value of Investors’ preferred shares even if additional shares are issued.

Anti-dilution provisions typically involve a broad-based weighted average dilution formula. This formula adjusts the price at which Preferred Stock will be converted to Common Stock based on the higher previous sale price relative to the lower current sale price and taking into account all of the Company’s stock on a fully-diluted basis (this is the “broad-base” in the denominator of the formula listed below).

This is in contrast to much more investor-friendly “narrow-based” weighted average or “full ratchet” formulas that take into account a narrower subset of outstanding stock (and a smaller denominator) and therefore result in a greater price at which the Preferred Stock converts into Common Stock.

Term Sheet Language: In the event that the Company issues additional securities at a purchase price less than the current Series A Preferred conversion price, such conversion price shall be adjusted in accordance with the following formula:

CP2 = CP1 * (A+B) / (A+C)


CP2 =Series A if Price in effect immediately after new issue

CP1=Series A Conversion Price in effect immediately prior to new issue

A=Number of shares of Common Stock deemed to be outstanding immediately prior to new issue (includes all shares of outstanding common stock, all shares of outstanding Preferred Stock on an as-converted basis, and all outstanding options on an as-exercised basis; and does not include any convertible securities converting into this round of financing)

B=Aggregate consideration received by the Company with respect to the new issue divided by CP1

C=Number of shares of stock issued in the subject transaction