Deriving the Counter Dilution Formula for Pro Rata Rights

Finding the Investment amount if exercising Pro Rata Investment Rights.

anti dilution formula

As discussed in an upcoming post, the following demonstrates that execution of Pro Rata Rights and the resulting new investment amount is independent of the company’s valuation. The portions containing the pre-money valuation cancel themselves out and in the end only the new investor’s investment amount determines how much an existing shareholder must re-invest in order to not be diluted.

CodeCogsEqn1CodeCogsEqn-2CodeCogsEqn-3

This makes sense conceptually if you think about it. For example, if the valuation is low, you are strongly diluted but can purchase new shares cheaply to compensate. On the other hand, with a high valuation the shares are expensive but you are not diluted by the new round as much.