Facebook raising more money, has termsheets, but what of anti-dilution protection?

I just read the Techcrunch report on Facebook‘s latest fundraising activities( Decision Time For Facebook: Term Sheets Received At $2 Billion Valuation).    The report talks about the potential heavy dilution that common stockholders might suffer because of 1) a fairly significant down round (taking pre-money valuation down from $15B to $2B) and 2)anti-dilution protection clauses that would apply to the previous investors’ ownership stakes (which means common would bear the brunt of the dilution).

From the article:

The cost of taking money at such a low valuation is higher than it appears. In addition to the direct dilution to stockholders from the new money, old investors at the $15 billion valuation may need to be made whole. Venture rounds traditionally include anti-dilution provisions that give investors more stock if the company raises new money at a lower valuation. Those anti-dilution provisions are heavily negotiated and can end up anywhere from full protection (which is very rare) to no protection at all (which is also very rare). It’s likely that there will be some form of additional dilution, possibly a lot of it, from the $375 million Facebook has raised at that valuation.

Although the current investors will certainly want to preserve their ownership stake as much as possible in any new deal, new investors are not going to do a deal that they think will drive out key employees and founders in droves.

There are a couple of ways to get around this issue.  The new investors could require the old investors to waive their anti-dilution protection as a condition of investment.  Or, the new investors could require that more common stock options get issued prior to closing.  These options could be use to refresh employees and founders who experienced heavy dilution due to the down round financing.  My guess is that both of these mechanisms will be a part of any new Facebook deal.

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