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CA Final · Advanced Financial Management · Startup Finance

In a term sheet for Meera Logistics, the investor holds Series A preference shares with a broad-based weighted average anti-dilution clause. What is the purpose of this clause?

Anti-dilution protects the investor in a down round by reducing the conversion price of preference shares when new shares are issued at a lower price. The weighted average method factors in the size of the new issue, so it is milder than a full ratchet.

  1. ATo adjust the investor's conversion price downward if the company later issues shares at a lower price, softening the dilution effectCorrect
  2. BTo guarantee the investor a fixed dividend every year
  3. CTo allow founders to buy back the investor's shares at cost after two years
  4. DTo force an IPO within a fixed period

Explanation

Anti-dilution protects investors from down rounds by lowering the conversion price. The weighted average method considers the size of the new issue, making it less harsh than full ratchet. The other options describe dividend, buy-back or exit rights.

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