Best way to protect searcher’s equity stake from post-investment dilution

searcher profile

March 15, 2021

by a searcher from London Business School in Montreal, QC, Canada

Hi everyone!

Would love to hear if there is a good mechanism to protect/insulate the searcher’s equity from post-investment capital injections (i.e. to finance add-on acquisitions) such as an anti-dilution clause. Any thought is appreciated!

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commentor profile
Reply by an investor
from University of California, Berkeley in San Francisco Bay Area, CA, USA
You could structure it in two ways: 1. Issue yourself a separate class of "founder" common stock that includes an anti-dilution provisions. It should be possibly to negotiate this with investors subject to certain limitations, e.g. does not apply in a down-round, maxes out after a certain amount of additional capital has been contributed, etc, or. 2. Structure your equity participation as a profit share where you get a fixed percentage of any profits realized
commentor profile
Reply by a searcher
from London Business School in Montreal, QC, Canada
Thanks guys! Super helpful. As an investor you’re often told that it can be much better to have a smaller piece of a bigger pie rather than the inverse but the opportunity I am looking at implies using the target as the foundation for many sizeable add-on acquisitions that will mostly be financed through additional equity raises and I want to make sure I don’t end up in a position where I am disincentivized to execute on these acquisitions.
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