Anti-dilution

Anti-dilution clauses are contractual provisions in investment agreements that are intended to protect investors from a dilution of their shares through subsequent financing rounds at a lower price. They are often found in financing agreements of start-ups and regulate the adjustment of the conversion price of preference shares or convertible loans. These clauses are particularly relevant in the German start-up scene, where several rounds of financing are common.

Types of anti-dilution clauses

There are various types of anti-dilution clauses that can be agreed in financing agreements: 1. Full ratchet: The conversion price is adjusted to the lower price of the new financing round, regardless of the amount of the new investment. This leads to a strong dilution of the other shareholders. 2. weighted average: the conversion price is adjusted taking into account the size of the new investment. The larger the new financing round, the smaller the adjustment. There are various calculation methods (broad-based, narrow-based). 3. pay-to-play: investors must participate in future financing rounds in order to benefit from anti-dilution. Otherwise they lose this protection.

Legal classification in Germany

In Germany, anti-dilution clauses are generally permissible, but are subject to the limits of company law. They must not violate mandatory statutory provisions or common decency. When drafting such clauses, particular attention must be paid to compliance with the principle of equal treatment and the prohibition on the return of capital contributions. The specific structure often depends on the legal form of the company, whereby special company law requirements must be observed in the case of a GmbH.

Effects and challenges

Anti-dilution clauses can have a significant impact on the capital structure of a startup: 1. protection for investors: they offer investors security against losses in the value of their shares in subsequent financing rounds at lower valuations. 2. complexity: the implementation and management of anti-dilution clauses can significantly complicate a company’s cap table 3. dilution of founders: Strong anti-dilution clauses can lead to a significant dilution of the shares of founders and early employees. 4. negotiating position: The existence of anti-dilution clauses can affect the company’s negotiating position in future financing rounds.

Practical considerations

The following aspects should be taken into account when negotiating and implementing anti-dilution clauses: 1. balance: a balance should be found between the protection of investors and the interests of the founders. 2. flexibility: the clauses should leave room for future financing rounds and strategic decisions 3. transparency: all parties should understand the potential impact of the clauses 4. legal advice: Due to the complexity and legal implications, expert legal advice is essential.

Conclusion

Anti-dilution clauses are an important instrument in startup financing that offers investors protection and can make investments more attractive. At the same time, they can affect the interests of founders and other shareholders. Careful consideration and drafting of these clauses is crucial in order to find a fair balance between the interests of all parties involved and at the same time meet the legal requirements of German corporate law. Startups and investors should be aware of the long-term implications of these clauses and consider them in the context of the company’s overall strategy.