Fundraising
Anti-dilution
A protective provision for preferred-share investors that adjusts the conversion price of their shares if the company later raises at a lower valuation (a down round).
In plain English
If you raise the next round at a price below this round's price, the existing investors get extra shares to compensate them — diluting founders and common shareholders. Mechanic ranges from mild (weighted-average) to brutal (full-ratchet).
Example
Series A investor pays $1.00/share. Series B is a down round at $0.50/share. Under weighted-average anti-dilution, Series A's conversion price drops modestly (factoring in the size of the down round). Under full-ratchet, Series A's conversion price drops to $0.50/share — they get 2× the shares they originally paid for.
Why it matters
Anti-dilution is the most consequential single term in a down round. Full-ratchet anti-dilution can wipe out founders' equity entirely; weighted-average preserves most of it. Investors almost always ask for weighted-average; some ask for broad-based, which is slightly more founder-friendly than narrow-based.
Common mistakes
- Accepting full-ratchet anti-dilution — vanishingly rare today; almost always negotiable to weighted-average
- Not understanding the difference between broad-based and narrow-based weighted-average — broad-based includes options + warrants in the denominator (better for founders)
- Forgetting that anti-dilution triggers on the conversion price, not the cap table directly — the math compounds through later rounds
- Confusing pay-to-play (separate provision) with anti-dilution