Glossary

Anti-Dilution Provision

An anti-dilution provision adjusts the conversion price of preferred shares when a company issues new shares at a price below the original round.

Plain definition

What it means.

An anti-dilution provision sits inside the term sheet of a preferred share round. It adjusts the conversion ratio of preferred shares when the company later issues new shares at a price lower than the price the protected investor paid.

Two structures are common. Full ratchet adjusts the preferred conversion price all the way down to the new lower price, regardless of how many new shares were issued. Weighted-average adjusts the conversion price by a formula that accounts for both the new price and the size of the new issuance. Weighted-average is the more common structure. Full ratchet is more aggressive and more punishing to founders.

An anti-dilution provision is the rule that decides who pays for a down round. The structure of the provision decides how much.

What goes wrong

The failure pattern this term exists to prevent.

The down round nobody modeled

Founders model up-round scenarios because that is the success case. The dilution math of a down round only gets built when the down round is already on the table. By then the conversion ratchet is already triggered.

Full ratchet looks survivable on paper

In a clean reduction, full ratchet looks like a small adjustment. After two rounds, three follow-ons, and a partial down round, the ratchet recalculation can hand the preferred stack a meaningful piece of the founder's equity.

Board pressure points the wrong way

A down round triggers anti-dilution. Anti-dilution favors existing investors. Existing investors sit on the board. Pressure to take a deal at the lower number can grow when the math benefits the people approving it.

The waiver never comes free

Anti-dilution can be waived. Investors will sometimes agree to waive it for a strategic reason. The waiver almost always comes paired with another concession: more board control, a heavier preference, a longer vesting reset, or a new protective term.

Founder questions

The questions people actually ask.

What is full ratchet anti-dilution? Full ratchet adjusts the preferred conversion price all the way down to the new lower share price, regardless of the size of the new issuance. Even a small down-round issuance can produce a large dilution adjustment for common shareholders.

What is weighted-average anti-dilution? Weighted-average adjusts the preferred conversion price using a formula that accounts for the new price and the number of new shares. Smaller issuances produce smaller adjustments. It is the more common structure in private rounds.

When does anti-dilution actually trigger? It triggers when the company issues new shares at a price lower than the price the protected preferred investor paid. The exact trigger conditions, exclusions, and adjustment formula are written into the share terms.

Can anti-dilution be waived or removed? Yes. Investors can waive it for a specific issuance or remove it permanently. Waivers usually require approval from the protected class and almost always come paired with a different concession the founder gives up.

Bigger picture

Where this fits in the structure.

Liquidation preference decides exit payout order. Anti-dilution decides who absorbs a down round before the exit ever arrives.

Related structure Preemptive Rights

Preemptive rights protect investor ownership percentage in new issuances. Anti-dilution protects investor share value when those issuances price low.

The case pattern of investor protections compounding against founder equity inside a real founder-led company.

Related reading

Read the operating version next.

Related reading

If a down round or a ratchet recalculation is in front of you, that is a different conversation.

Bring the cap table, the term sheet, and the proposed issuance scenario.

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