Anti-dilution protection in venture capital

In the realm of venture capital (VC) investments and equity financing, the concept of economic dilution holds a significant place. While percentage dilution is a direct consequence of any new stock issuance, being grounded in the fundamental principle that each share of stock carries with it a vote, economic dilution unfolds when new securities are sold at a price that is lower than the value attributed to the existing securities at the time of financing. In essence, economic dilution entails the transfer of value from old shareholders to new shareholders. This form of dilution encapsulates the financial repercussions of equity issuance, in which existing shareholders bear the brunt of reduced share value, often as a consequence of subsequent fundraising rounds. This encyclopedia entry sheds light on the methods employed by venture capitalists to navigate economic dilution.