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Anti-Dilution Protection
Investor rights that protect against ownership dilution if the company raises money at a lower valuation.
Formula
Weighted Average Anti-Dilution:
New Price = Old Price x [(Old Shares + New Money/Old Price) / (Old Shares + New Shares)]
Full Ratchet:
New Price = Down Round Price
Definition
What is Anti-Dilution?
Anti-dilution provisions adjust investor share prices if you raise a down round (lower valuation than previous rounds). It protects early investors from losing ownership percentage.
Types of Anti-Dilution
Full ratchet: Investor price adjusts to new lower price entirely. Weighted average: Adjustment proportional to round size. Broad-based weighted average is most founder-friendly and most common.
Impact on Founders
In down rounds, anti-dilution protection increases investor shares at the expense of common shareholders. The dilution founders expected gets worse. Negotiate for broad-based weighted average when possible.
Example
Series A at $10M pre, $2M invested at $1/share.
Series B at $6M pre (down round), $1M at $0.60/share.
Full Ratchet: Series A price drops to $0.60, shares increase from 2M to 3.33M.
Weighted Average: Series A price adjusts to ~$0.85, shares increase to ~2.35M.
Full ratchet is much more punitive to founders.
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