Antidilution
written by David A. Broadwin
I have now run into the follow issue twice in recent transactions: the term sheet drafted by counsel representing a venture fund proposes antidilution provisions and sets forth a specific formula. This formula does not factor in shares of common stock issuable upon outstanding convertible securities and warrants or options.
So, it is not a so-called broad based weighted average formula. A broad based formula would take into account 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 the then current round of financing. See NVCA Term Sheet (.doc).
In conversations among the business people, the antidilution provision is described to the entrepreneur as "standard." The fact that the antidilution is not broad based comes out in the review of the term sheet. When asked, counsel for the investor says that the formula is exactly as it is always used by the particular investor. Investigation, of course, turns up other transactions in which the investor has agreed to a broad based weighted average formula, and everyone readily agrees to go with the broad based approach. Make no mistake about it: broad based is the "norm" and you should not agree to anything else, unless you understand it and there is a reason.