The antidilutive definition refers to a situation where the addition of new shares would actually increase the earnings per share (EPS) of a company. This can happen when a company issues new shares to raise capital, but the new shares are purchased by existing shareholders at a price that is higher than the current market price. The new shares dilute the earnings of the existing shareholders, but the increased price more than offsets this dilution.
What is EPS and its types? EPS is defined as the portion of a company's profit allocated to each outstanding share of common stock. It is a key metric used by investors to determine a company's profitability and to compare it against other companies in the same industry. There are two types of EPS: Basic EPS and Diluted EPS.
Basic EPS is calculated by dividing a company's net income by the number of its outstanding shares.
Diluted EPS, on the other hand, takes into account the dilutive effect of options and other securities. It is calculated by dividing a company's net income by the number of its outstanding shares, after taking into account the dilutive effect of options and other securities. What is dilution in finance? Dilution is a reduction in the ownership percentage of a shareholder in a company as a result of the issuance of new shares. For example, if a shareholder owns 10% of a company's shares outstanding and the company issues new shares equal to 20% of the current outstanding shares, the shareholder's ownership percentage will be reduced to 8%.
Dilution can also occur when a company issues new shares in order to raise capital. For example, if a company issues new shares at a price of $10 per share and the current shareholders own 10% of the company, they will now own 8.3% of the company.
Dilution can have a negative impact on shareholders because it can reduce the value of their investment and their voting power. For example, if a shareholder owns 10% of a company's shares outstanding and the company issues new shares equal to 20% of the current outstanding shares, the shareholder's ownership percentage will be reduced to 8%. The value of the shareholder's investment will also be diluted because the new shares will be issued at a price of $10 per share, which is lower than the current market price of the shares.
Dilution can also have a positive impact on shareholders because it can increase the value of their investment. For example, if a company issues new shares at a price of $10 per share and the current shareholders own 10% of the company, they will now own 11.1% of the company. The value of the shareholder's investment will also be increased because the new shares will be issued at a price of $10 per share, which is higher than the current market price of the shares.
What triggers anti-dilution?
Anti-dilution provisions are typically triggered when a company issues new equity at a price below the price per share of the original investment. This can happen, for example, when a company sells new shares to raise additional capital, or when it issues shares to employees or other service providers as compensation.
When anti-dilution provisions are triggered, the original investors typically have the right to purchase additional shares at the same price per share as the new shares that were issued. This allows the original investors to maintain their percentage ownership stake in the company, preventing their ownership from being "diluted" by the new shares.
There are a variety of different types of anti-dilution provisions, which can be triggered by different events and can provide different rights to the original investors. Some common types of anti-dilution provisions include:
- Full ratchet: This type of provision is triggered when new shares are issued at a price below the original investment price. The original investors are entitled to purchase additional shares at the same price per share as the new shares that were issued.
- Weighted average: This type of provision is triggered when new shares are issued at a price below the original investment price. The original investors are entitled to purchase additional shares at a price per share equal to the weighted average of the original investment price and the new share price.
- Broad-based weighted average: This type of provision is triggered when new shares are issued at a price below the original investment price. The original investors are entitled to purchase additional shares at a price per share equal to the weighted average of the original investment price and the new share price, adjusted for the number of shares outstanding.
- Partial ratchet: This type of provision is triggered when new shares are issued at a price below the original investment price. The original investors are entitled to purchase additional shares at a price per share equal to the original investment price, less a percentage What is price based anti-dilution? Price based anti-dilution is a form of anti-dilution protection that is typically included in the terms of a convertible security. It is designed to protect the holder of the security from the effects of dilution that can occur if the issuer raises additional capital at a price per share that is lower than the conversion price of the security.
Under price based anti-dilution protection, the conversion price of the security is adjusted downwards to the price of the new shares issued by the issuer. This effectively reduces the number of shares that the holder of the security will receive upon conversion, but protects them from the effects of dilution.
Price based anti-dilution protection is typically only triggered if the issuer raises additional capital through a new equity financing round. If the issuer raises debt financing, or if it issues new shares for other purposes such as employee stock options, the conversion price will not be adjusted.
Some investors may view price based anti-dilution protection as a negative, as it can reduce the upside potential of their investment. However, it can also be seen as a form of insurance against the downside risk of dilution.