Anti-Dilution Protection Explained: Broad-Based Weighted Average vs Full Ratchet

Anti-dilution protection is a clause in your term sheet that protects investors if you raise a future round at a lower valuation than the current one. It's standard, mostly fair in its market form, and dangerous in its harshest form. This article walks through both.

The short version

The standard in 2026 is broad-based weighted average anti-dilution. It adjusts the conversion price of the previous round's preferred shares slightly downward if a future round prices lower, giving the previous investors a small additional ownership boost.

The harsher form, full ratchet anti-dilution, treats the previous round as if it had been priced at the new (lower) valuation, dramatically increasing the previous investor's share count. Almost universally bad for founders. Push back hard if you see it.

Why anti-dilution exists

Investors want protection against down rounds — rounds priced below the previous round. Without protection, an investor who paid a high price for shares can be punished if the company struggles and has to raise lower.

Anti-dilution rebalances some of that pain by giving the original investor more shares (effectively a price adjustment) when a down round happens.

How it actually works

The clause specifies a formula for adjusting the conversion price of preferred shares when a down round occurs. Two main formulas:

Broad-based weighted average

The mathematical adjustment to the conversion price reflects the dilutive effect of the down round, weighted across the full diluted share count (including options, warrants, and conversion of all preferred). The result: a modest adjustment that gives the previous investor some additional shares but doesn't dramatically reshuffle the cap table.

The formula:

NCP = OCP × (A + B) / (A + C)

Where:

• NCP = New Conversion Price (after adjustment)
• OCP = Original Conversion Price
• A = Total shares outstanding before new round (broad-based: includes options + all converted preferred)
• B = Shares "deemed" issued for the new money at OCP
• C = Shares actually issued in the new round at the new (lower) price

In practice, this produces a small downward adjustment in the conversion price, which means the original investor gets a modestly larger share count. Not punitive.

Narrow-based weighted average

Same formula, but with a smaller "A" — including only outstanding preferred (not options/warrants). Slightly more punitive than broad-based, but still bounded.

Full ratchet

The conversion price of the previous preferred is adjusted all the way down to the new round's price. The previous investor effectively gets the same per-share price as the new round investors.

Example: investors paid $10/share in your Series A. You raise a Series B at $5/share. Under full ratchet, the Series A conversion price drops to $5/share — meaning their existing shares now convert at the new lower price, doubling their effective ownership.

Full ratchet is brutal. A modest down round can transfer significant ownership from founders to previous investors. Almost no respectable seed or Series A term sheet uses full ratchet in 2026 — if you see it, push back hard.

When anti-dilution actually triggers

Three things to know.

1. Only on a true down round. If you raise the next round at the same or higher valuation, no anti-dilution adjustment occurs. Anti-dilution is invisible during good times.

2. Each round's anti-dilution is independent. A down round triggers anti-dilution on each prior preferred class with anti-dilution rights. So a down Series B might trigger adjustments to both Series A and seed preferred (if seed had anti-dilution).

3. Anti-dilution only adjusts conversion price, not share count directly. The mathematical effect is to give the investor more shares-at-conversion, but their original share count stays the same on paper until they convert.

The "pay-to-play" twist

Some anti-dilution clauses include a "pay-to-play" provision: an investor only gets anti-dilution protection in a down round if they participate (write a follow-on cheque). Investors who don't participate forfeit the protection.

Pay-to-play is generally good for founders and for the company — it incentivises investors to support the round rather than free-ride. If you can negotiate pay-to-play language into your anti-dilution clause, do it.

What to negotiate

A clean term sheet:

1. Broad-based weighted average anti-dilution as the form. Standard. Don't over-negotiate this — it's market.
2. Pay-to-play language if you can get it. A meaningful improvement.
3. No full ratchet. Push back if you see it. The only context where it's defensible is a distressed restructuring, and even then it's harsh.
4. Reasonable carve-outs. Standard carve-outs exclude certain issuances (option grants from the pool, conversions of existing preferred, M&A consideration) from triggering anti-dilution. These are normal.

Why it matters even if you never have a down round

If you ever raise a flat or higher round, anti-dilution doesn't trigger and the clause is moot. So why care?

Because rounds that might be down rounds cause real pain even when not yet happening. A pre-Series B founder modelling outcomes will see what happens in a $80m post-money Series B vs a $60m post-money Series B (a down round). The cap-table differences under different anti-dilution clauses are stark.

Knowing the shape ahead of time helps you price the trade-offs of opening a difficult round vs running leaner instead.

A note on extreme cases

In a very tough down round — say, a 50% valuation drop — even broad-based anti-dilution can produce meaningful re-shuffling. In those cases, founders are usually doing a recap with the existing investors, and the negotiation involves much more than the anti-dilution clause: option pool refresh, founder vesting reset, sometimes restructuring of existing preferred.

These are special cases. For standard fundraising at seed, Series A, or Series B in healthy markets, broad-based weighted average anti-dilution is the right default and rarely produces drama.

The bottom line

Anti-dilution is a clause most founders sign without thinking carefully — and that's usually fine, because the standard form is reasonable. The trap is when the clause isn't standard. A 30-second check at term sheet time will tell you whether you're in the safe zone or not.

Read the clause. Confirm it's broad-based weighted average. Push back on full ratchet. Move on.