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).
Founders routinely treat anti-dilution as boilerplate because it only matters in a down round. That's the mistake: the clause is mechanical and automatic, so there's no second negotiation when the down round arrives — whatever you signed years earlier simply executes, and the formula decides how much of the company earlier investors end up owning.
Within weighted-average, the base matters. Broad-based formulas count all outstanding shares — common, preferred, options, and usually warrants — which produces a smaller adjustment; narrow-based formulas count fewer shares and produce a bigger one. Charters also carve out certain issuances (option grants, conversions, some warrants) from triggering the adjustment, and those carve-outs are worth reading line by line.
Anti-dilution adjusts the conversion price of preferred stock; it doesn't preserve anyone's ownership percentage, and common holders get no protection at all.
Broad-based weighted average: new conversion price = old price x (A + B) / (A + C), where A = shares outstanding before the round, B = shares the new money would have bought at the old price, C = shares actually issuedA Series A investor bought 1,000,000 shares at $2.00 ($2M). Later the company issues 5,000,000 new shares at $1.00 ($5M), with 10,000,000 shares outstanding on a fully diluted basis beforehand. Broad-based weighted average: $2.00 x (10M + 2.5M) / (10M + 5M) = about $1.67, so the Series A shares now convert into about 1,200,000 common shares. Under full ratchet the conversion price drops all the way to $1.00 and the same investment converts into 2,000,000 shares — a much bigger bite out of everyone else.
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.
What's the difference between broad-based and narrow-based weighted average anti-dilution?
Broad-based counts all outstanding shares (common, preferred, options, and usually warrants) in the formula, which produces a higher adjusted conversion price and less dilution for founders. Narrow-based counts fewer shares, producing a lower conversion price and more dilution. Broad-based is the market standard.
When does anti-dilution protection trigger?
Only when the company issues new shares below the existing preferred's conversion price — a down round — and only for issuances not carved out in the charter. Flat and up rounds leave it untouched.
What is a pay-to-play provision?
A clause that penalizes existing investors who don't participate pro rata in a new (usually down) round, typically by stripping their preferred protections or converting their preferred to common. It pushes insiders to support a struggling round.
Related terms
Run the numbers yourself: dilution, SAFE conversion, and fund-returner calculators.