Anti-Dilution Rights — Weighted Average Method [Part 3 of the five-part series]

average

In Part 1 of the Anti-Dilution Rights story, we discussed the Anti-Dilution Rights in general, and identified that there are two mechanisms for Anti-Dilution Rights protection: i. Full Ratchet Method; and ii. Weighted Average Method.

In this Part 3, we will dig deeper into the Weighted Average Method.

The Weighted Average Method of calculation is used more extensively as this method gives importance to the proportionate relevance of the investments, made in both the rounds.

· Under this method, it is first assumed that all shares of the start-up company issued before the 1st round of investment were subscribed at the price per share similar to the price per share of the 1st round of investment (this is done to take into account the increase in valuation of the start-up company since incorporation to the time of 1st round of investment).

· Thereafter, the price per share at 1st investment is multiplied with the total shares in the start-up company after 1st investment (including the shares issued to the 1st investor).

· The result is then added with the 2nd round investment amount to arrive at the actual investment in the start-up company after the 2nd round investment.

· This is then divided with the total number of shares in the start-up company after the 2nd round investment.

· The result will be the weighted average price per share.

· Thereafter, the 1st round investment amount shall be divided by the weighted average price per share.

· The result will be the number of shares that the 1st investor would have received if the weighted average price per share was the price at which the 1st investment was made.

· This, when deducted by the shares actually received by the 1st investor, will determine the additional shares to be issued to the 1st investor under the Weighted Average Method.

As an example,

Total shares of start-up company before 1st round of investment = 800 shares (Shares before 1st investment)

Calculation:

{100 * (800 + 100)} + 5000} / (800+100+100) = 95

10000/95 = 105.2 shares (105 shares -rounded down)

105–100 = 05 (Additional Shares to be provided to 1st Investor under the Weighted Average Method)