Anti-dilution protection adjusts the price at which an investor's preferred stock converts to common if the company later raises a round at a lower valuation, known as a down round. The two main types are broad-based weighted-average, the market standard that adjusts proportionally based on the size of the down round, and full-ratchet, an aggressive version that resets the conversion price to the new, lower round price regardless of how small that round is. Anti-dilution protects the investor, but it increases founder dilution specifically in down-round scenarios. Have a startup lawyer confirm which type applies before you sign.
Broad-based weighted-average, the market standard, adjusts the investor's conversion price proportionally, factoring in both the size of the down round and the company's total existing capitalization, so a small down round only causes a small adjustment.
Full-ratchet, the aggressive and much rarer version, resets the investor's conversion price all the way down to the new round's price, no matter how small that round is relative to the company's overall size. Full-ratchet is significantly more dilutive to founders and is uncommon in typical venture deals today.
A down round automatically triggers whichever anti-dilution provision earlier investors hold, issuing them additional shares to make up for the lower price, and that additional issuance dilutes the founders and everyone else on the common stock, while the protected investor is shielded from it.
An earlier investor bought preferred shares at $1.00 each. The company later raises a down round at $0.60 per share. Under broad-based weighted-average anti-dilution, the earlier investor's conversion price adjusts down toward that new price, but the adjustment is moderated by how large the new round is relative to the existing cap table, so the price typically lands somewhere between $0.60 and $1.00 depending on the round's size. Under full-ratchet, by contrast, that investor's conversion price would reset all the way to $0.60, regardless of how small the new round actually was, producing far more dilution for everyone else.
Broad-based weighted-average anti-dilution is the market standard at every stage from seed through later rounds. Full-ratchet is rare and typically only appears when a company is raising from a position of real weakness, so seeing it offered is itself a signal worth paying attention to.
Not knowing which type of anti-dilution is in your existing documents, which means you cannot accurately model what a future down round would actually do to your ownership.
Failing to model a down-round scenario at all before it happens, so the anti-dilution mechanics come as a surprise exactly when the company can least afford more complexity.
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