Anti-Dilution Protection
A provision that adjusts an investor's conversion price downward if the company later raises money at a lower valuation.
Anti-dilution protection shields existing preferred investors from being diluted at unfavorable prices if the company raises a down round. It works by adjusting the conversion ratio of their preferred shares into common stock, effectively issuing them more shares to compensate for the lower price of the new round.
The two main flavors are weighted-average (the common standard, which partially adjusts the conversion price based on the size and price of the new round) and full-ratchet (rare, aggressive, resets the investor's conversion price entirely to the new, lower round price regardless of how much new stock was issued). Full-ratchet is far more punishing to founders and existing common stockholders.
Anti-dilution protection only activates in a down round; it has no effect if every subsequent round is priced flat or up. It's a standard, largely non-negotiable term in nearly every US venture financing, with the real negotiation happening over which flavor (weighted-average broad-based is the market default).
Weighted-average broad-based anti-dilution is the market standard and reasonable to accept without much pushback; if a term sheet proposes full-ratchet, treat it as a serious red flag worth pushing back on hard, since it disproportionately punishes founders in a down round.
What's the difference between weighted-average and full-ratchet anti-dilution?
Weighted-average adjusts the conversion price proportionally based on how much new stock was issued and at what price, while full-ratchet resets the entire conversion price to the new round's price regardless of size — full-ratchet is far more dilutive to founders.
Related terms
Run the numbers yourself: dilution, SAFE conversion, and fund-returner calculators.