What is Anti-Dilution?

Anti-dilution provisions protect investors if a company raises money at a lower valuation than their round (a 'down round'). The investor's price per share is adjusted downward, giving them more shares.

Types:

• Full ratchet: Investor price adjusts to the new lower price (very aggressive)
• Weighted average: Adjusts based on how much was raised at lower price (more fair)
• Broad-based weighted average: Includes all shares in calculation (founder-friendly)

Example: Investor bought at $10/share. Down round at $5/share. Full ratchet: their price becomes $5, doubling their shares. Weighted average: adjustment is proportional to down-round size.

Impact: Anti-dilution can crush founder ownership in down rounds.

Full ratchet vs weighted average in detail: Under a full ratchet provision, the investor's conversion price resets entirely to match the lower price of the new round, regardless of how many shares are issued. This is the most aggressive form and can transfer enormous ownership from founders to investors even if only a small amount is raised at the lower price. In contrast, weighted average anti-dilution calculates a new conversion price based on the number of shares issued at the lower price relative to total outstanding shares. The more shares sold cheaply, the greater the adjustment, but it remains proportional. Anti-dilution provisions become especially important during down rounds, when market corrections or missed milestones force companies to raise at reduced valuations. In these scenarios, founders should negotiate for broad-based weighted average protections during initial funding to minimize the ownership impact if conditions deteriorate later.