Wednesday, April 28, 2010

anti-dilution clause

In 1995, a U.S. company, Alantec, was sold for $770 million. The founders, who thought they owned 90% of the stock, received a measly $600,000. Why? Venture capitalists who owned a small share of the company had been issuing the company’s common stock to many investors, which diluted the founder’s ownership to .007 percent. To prevent this type of dilution, stock sale and stock transfer contracts typically contain a provision that prevents the value of the stock from decreasing as a result of additional shares being issued (a process known as “dilution”).

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