Full Definition
Anti-dilution provisions protect investors from the economic impact of a company raising subsequent funding at a lower valuation (a "down round"). These provisions adjust the conversion price of the investor's preferred stock, effectively giving them more shares.
Types of Anti-Dilution
- Full Ratchet: The conversion price drops to the new, lower price. Most aggressive form — the investor is fully protected but founders and earlier investors are severely diluted.
- Weighted Average (Broad-Based): The most common type. Adjusts the conversion price based on the ratio of old shares to new shares, taking into account how many shares are issued at the lower price. More balanced for all parties.
- Weighted Average (Narrow-Based): Similar to broad-based but uses a smaller denominator, resulting in more protection for the investor.
Anti-Dilution Protection Types
| Type | Protection Level | Founder Impact | Common Usage |
|---|---|---|---|
| Full Ratchet | Maximum | Most dilutive | Rare / aggressive |
| Weighted Average (Broad) | Moderate | Balanced | Standard in most deals |
| Weighted Average (Narrow) | Above moderate | More dilutive | Occasionally used |
Real-World Example
An investor bought shares at $10/share with broad-based weighted average anti-dilution. When a down round prices shares at $5, their conversion price adjusts to $7.50.
Frequently Asked Questions
What triggers anti-dilution protection?
Which anti-dilution type is most common?
Related Terms
The reduction in existing shareholders' ownership percentage when new shares are issued.
A funding round where a company raises capital at a lower valuation than its previous round.
A class of shares with special rights and preferences over common stock, typically held by investors.
A non-binding document outlining the key terms and conditions of a proposed investment deal.
The right of preferred shareholders to be paid before common shareholders in a liquidation event.
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