Non Dilution Agreement

A non-dilution agreement, also known as an anti-dilution provision, is a legal contract that aims to protect a company`s investments by preventing the dilution of their ownership percentage in a business. This agreement is commonly used in venture capital and private equity deals, where investors want to safeguard their investment against future equity issuance that would reduce their ownership.

In short, a non-dilution agreement stipulates that in the event of a future equity issuance, the existing equity holders will have the right to purchase new shares at the same price as the new investors. This ensures that the existing shareholders maintain their ownership percentage and are not diluted by the new issuance.

There are two types of non-dilution agreements – full ratchet and weighted average. Full ratchet protection is the most stringent and gives existing shareholders the right to purchase new shares at the same price per share as the new investor, regardless of the number of shares issued. Weighted average protection, on the other hand, considers both the price and the number of shares issued in the future equity issuance to determine the new purchase price for existing shareholders.

Non-dilution agreements are beneficial to both investors and the company. For investors, it ensures that they maintain their percentage of ownership and protects their investment from being diluted by future equity issuances. For companies, it can help attract investors by providing them with a level of protection and assurance that their investment will not be diluted in the future.

It is important to note that non-dilution agreements can be complex legal documents that require consultation with an attorney experienced in this area of law. It is also crucial that the terms of the agreement are negotiated carefully to ensure that both parties are satisfied with the agreement`s terms.

In conclusion, a non-dilution agreement is an essential provision in many investment deals, particularly in venture capital and private equity transactions. It protects both the investors and the company from future equity issuances that would result in the dilution of the existing shareholders` ownership percentage. As with any legal document, it is crucial to seek professional advice to ensure that the agreement`s terms are fair and protect the interests of all parties involved.