Non-diluting shares explained, and why you should never ever issue them to anyone

Occasionally we come across founders calling us at SeedLegals saying they have an investor or advisor asking for non-diluting shares, and how can they set that up. You should never ever give non-diluting shares to anyone. It’s a disaster that can kill your company by making it uninvestable.

If you ever have an investor, co-founder, employee or advisor asking for non-diluting equity in your company, send them this video where I explain how non-diluting shares work, and why if someone asks for them, just say no.

Anti-Dilution shares are shares that protect an investor against a down-round in the future.

if your next funding round is at the same or higher price per share as this round then the shares behave just like ordinary shares, and that investor gets diluted along with all the other shareholders.

but, if your new round is at a lower price per share than the round where the investor invested, then you’re agreeing to top up their shareholding to compensate them.

Giving an investor anti-dilution shares can substantially dilute the founders and the existing shareholders if your next round is a down round (i.e. at a lower valuation).

VCs will usually insist on getting Preference shares with anti-dilution rights (to protect them in case your next round is at a lower valuation). You probably won’t be able to dissuade them of that, VCs simply insist on it in later-stage rounds. So if you’re raising £1M from a VC and they want Preference shares with anti-dilution rights, sure, you can try to argue against that, but you’re probably not going to win that one.

On the other hand, you should try to avoid giving shares with anti-dilution to angel investors – for a start they will lose their SEIS/EIS if they get anti-dilution shares, so you’ll use that argument to show them they’re much better off with SEIS/EIS than the chance of getting a top-up if you have a down round later.

Non-Dilution shares are shares that don’t get diluted in the next (or even any future) funding round.

Every investor would love to have special shares that don’t get diluted in subsequent rounds!

But, achieving that non-dilution means you and existing investors will effectively be buying shares for the person who has non-diluting shares so they maintain their % equity without having to buy more shares like everyone else. And that’s not something the other investors are going to be happy to do!

You should never ever give anyone non-diluting shares – it can not only ruinously dilute the founders, but also make your company uninvestible in the future because future investors will see that they too will be buying shares, from their own equity, to top up the person you unwisely gave non-diluting shares to.

At SeedLegals we’re so keen that you never ever give anyone non-diluting shares that the SeedLegals team will likely insist you speak to the SeedLegals CEO before letting you do that.

Some UK universities ask for non-diluting shares in their spinouts (“We want 10% equity in your company, and it should stay 10% after each round”). Talk to us before agreeing to that.

Non-dilution is configured, after we’ve tried to dissuade you, in the Advanced Terms -> Non-Dilution section in the funding round questions on SeedLegals.

Anti-Dilution and Non-Dilution kill SEIS/EIS

Any form of anti-dilution or non-dilution protection will immediately disqualify that investor from getting SEIS or EIS, which is one reason why these are almost never given in early-stage UK funding rounds.