Anti-Dilution Provisions: What Founders Need to Know

What Anti-Dilution Provisions Do

Anti-dilution provisions protect investors if the company raises a future round at a lower valuation (a 'down round'). They adjust the investor's conversion price downward, giving them more shares to compensate for the decline in value.

From the founder's perspective: anti-dilution provisions shift the cost of a down round from investors to founders. The type of provision determines how much of that cost you bear.

Broad-Based Weighted Average: The Standard

Broad-based weighted average is the founder-friendly standard. It adjusts the investor's conversion price based on a formula that accounts for: the original price, the new lower price, the number of shares outstanding, and the number of new shares issued.

The effect is moderate: in a down round, the investor gets some additional shares, but the adjustment is proportional to the severity of the down round and the amount of new capital raised.

This is the provision you should expect and accept at seed and Series A. It's fair protection for investors without being punitive to founders.

Full Ratchet: The Founder Penalty

Full ratchet adjusts the investor's conversion price to match the new lower price exactly — regardless of how many shares are issued in the down round.

Example: Investor bought at $10/share. Down round prices shares at $5/share. Full ratchet reprices ALL of the investor's shares to $5, effectively doubling their ownership.

This is extremely dilutive to founders. Even a small down round can trigger massive ownership transfer. A company raising $500K at a lower price could cause millions of dollars in dilution to the founder's position.

Full ratchet should be rejected at seed and Series A. If an investor insists, it's a strong signal that they're not founder-aligned. Walk away or negotiate hard for broad-based weighted average.

How to Negotiate Anti-Dilution Terms

Start from broad-based weighted average as your baseline — this is market standard and most investors won't push back.

If an investor asks for full ratchet: counter with broad-based weighted average plus a sunset clause (the full ratchet converts to broad-based after 18-24 months).

Pay-to-play provisions: Consider adding language that requires investors to participate in the down round to receive anti-dilution protection. This prevents investors from getting protected without contributing additional capital when the company needs it most.

The key insight: anti-dilution provisions only matter if there's a down round. The best protection isn't the legal provision — it's positioning your company to never need a down round in the first place.