dilution protection

A provision in an investment that is designed to protect existing shareholders from reduced earnings. Dilution occurs when earnings have to be spread among an increased number of shares. One dilution protection measure adjusts the conversion ratio used to calculate the value of convertible securities if a stock dividend is paid. Another dilution protection technique is a full-ratchet provision, which automatically increases the equity percentage held by the original investors if subsequent investment rounds decrease a company’s value. A dilution protection provision is typically found in venture capital funding agreements.