When a company issues new shares, it dilutes the stake of investors that already hold shares in the company. Dilution also occurs when options are exercised by their owners. In both cases, dilution results from an increase in the total number of outstanding shares.
Since this results in a decline in the value of currently outstanding shares, investors often insist on including an anti-dilution provision. The provision entitles investors to convert their preferred stock to equity stock at an adjusted conversion price.