Anti-dilution protection is a preferred shareholder provision that adjusts the conversion price of preferred stock downward if the company subsequently issues shares at a lower price (a down round), protecting investors from value erosion. Broad-based weighted-average anti-dilution is the market standard; full-ratchet anti-dilution is the most investor-protective variant. The SEC requires disclosure of anti-dilution provisions in registration statements and Reg CF Form C filings. See sec.gov.
Anti-dilution provisions protect preferred stock investors when a company issues new shares at a price below the investor's original investment price (a 'down round'). Without anti-dilution protection, existing preferred shareholders would be diluted on both an economic and percentage basis. Anti-dilution adjusts the conversion ratio of preferred stock so investors receive additional shares upon conversion to common, partially compensating them for the lower price. Two main variants: 1. Broad-Based Weighted-Average Anti-Dilution (market standard): The new conversion price is calculated as a weighted average of the old price and the new (lower) price, weighted by the number of shares in each issuance. Because this weighs all shares outstanding (including the option pool and other dilutive securities), it is 'broad-based' — the dilutive impact is spread more evenly. This is the standard in NVCA model term sheets and is considered founder-friendly relative to full-ratchet. Formula (simplified): New Conversion Price = Old CP × (Shares Outstanding + Shares Issuable at Old CP) / (Shares Outstanding + Shares Actually Issued) 2. Full-Ratchet Anti-Dilution (most investor-protective): Resets the conversion price to the new (lower) per-share price regardless of how many shares were issued at the lower price. Even if only 100 shares are issued in a down round at $0.50, full-ratchet adjusts the entire preferred class to convert at $0.50. Full-ratchet is highly punitive to founders and rarely acceptable in balanced deals after Seed/Series A. When anti-dilution triggers: Down rounds — financing at a lower per-share price than a prior round. Also triggered by certain deemed issuances below the conversion price (option grants below conversion price may trigger weighted-average adjustments in some term sheets). Practical impact: In a significant down round, anti-dilution adjustments can dramatically shift the ownership table. If preferred investors receive enough additional shares on conversion, founders' common stock ownership may become a fraction of what was projected. See sec.gov/divisions/investment for SEC guidance on private company investment disclosures.
Both use weighted-average formulas, but they differ in what 'shares outstanding' includes. Broad-based includes all shares in the fully diluted count (options, warrants, convertibles) — a larger denominator — resulting in a less aggressive adjustment (better for founders). Narrow-based includes only actually issued and outstanding shares — a smaller denominator — resulting in a more aggressive adjustment (better for investors). Broad-based is the market standard in NVCA model documents.
Yes, with investor approval. Many startup financing rounds include waiver provisions allowing a specified percentage of preferred holders to waive anti-dilution adjustments — often required to close a down round that existing investors support for survival. Waivers must be properly documented in a written amendment or consent from the required investor percentage specified in the certificate of incorporation.
Anti-dilution provisions apply to preferred equity — convertible preferred stock that is the standard institutional venture investment vehicle. Loans (term loans, lines of credit, convertible notes pre-conversion) do not have anti-dilution provisions. Convertible notes with a valuation cap have an economic analog: if the cap is lower than the next round price, the note converts at more favorable terms — not called anti-dilution but economically similar.