What is Anti-Dilution?
Anti-dilution provisions protect investors from ownership dilution if a company raises future funding at a lower valuation (a down round). The investor's conversion price is adjusted downward, giving them more shares to maintain closer to their original ownership percentage.
Anti-dilution is triggered only in down rounds, not normal dilution from new financing.
Types of Anti-Dilution
Full ratchet: The most aggressive protection. Conversion price drops to the new lower price regardless of how many shares are issued. Weighted average: More common and founder-friendly. Adjusts price based on how much money is raised at the lower price and how low the price is. Broad-based: Includes all shares in the calculation. Narrow-based: Excludes some shares, making the adjustment more severe.
Impact on Founders
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.
Further Reading
Bootstrapped, Seed-Strapped, or VC-Backed? How to Fund Your Startup in the AI Age
Formula
Full Ratchet: New Price = Down Round Price
Weighted Average: New Price = ((Old Price × Old Shares) + (New Price × New Shares)) ÷ (Old Shares + New Shares)
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.