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Anti-Dilution
Protection that adjusts an investor's share price if the company later raises money at a lower valuation.
Formula
Full Ratchet: New Price = Down Round Price
Weighted Average: New Price = ((Old Price × Old Shares) + (New Price × New Shares)) ÷ (Old Shares + New Shares)
Definition
What is Anti-Dilution?
Anti-dilution provisions protect investors if the company raises money at a lower valuation than their round (a down round). The protection adjusts their share price downward, giving them more shares to compensate.
Without anti-dilution, an investor who paid $10/share watches their ownership dilute when new investors pay $5/share. Anti-dilution adjusts their effective price closer to the new lower price.
Types of Anti-Dilution
Full Ratchet: Investor's price adjusts fully to the down round price. Very investor-friendly, can devastate founder ownership. Weighted Average: Price adjusts based on how much money was raised at the lower price. More balanced. Broad-based weighted average (most common) includes all shares in the calculation.
Why Anti-Dilution Matters
In good times, anti-dilution never triggers. In bad times, it can dramatically shift ownership from founders to investors. Negotiate for broad-based weighted average rather than full ratchet.
Example
Down round scenario:
- Series A: $2M at $10/share = 200K shares (20%)
- Series B (down round): $8/share
Full ratchet: Series A repriced to $8, gets 250K shares
Weighted average: Price adjusts based on how much was raised at lower price. Might adjust to $9.20, giving ~217K shares.
Weighted average is much more founder-friendly.
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