Anti-Dilution

Quick Definition

Protection that adjusts an investor's share price if the company later raises money at a lower valuation.

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.

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.