Question 1

What is anti-dilution protection?

Accepted Answer

Anti-dilution protection adjusts an investor's conversion price downward if the company later raises money at a lower valuation (a down round). This means the protected investor receives additional shares to compensate for the valuation drop, and those shares come at the expense of founder ownership.

Question 2

What is full ratchet anti-dilution?

Accepted Answer

Full ratchet adjusts the investor's conversion price to the new lower round price, regardless of how many shares are issued in the down round. This is the most punitive form for founders. If an investor paid $5 per share and the next round prices at $2 per share, the investor's conversion price drops to $2, giving them 2.5x as many shares.

Question 3

What is broad-based weighted average anti-dilution?

Accepted Answer

Broad-based weighted average is the market standard. It adjusts the conversion price based on a weighted average that considers how many new shares are issued relative to the total outstanding. The more shares issued in the down round, the more protection. But unlike full ratchet, a small down round has a proportionally small impact.

Question 4

Can founders negotiate anti-dilution provisions?

Accepted Answer

Yes. Push for broad-based weighted average (market standard) rather than full ratchet. Negotiate carve-outs for employee grants and strategic issuances. Consider pay-to-play provisions that require investors to participate in the down round to keep their anti-dilution protection. Sunset clauses that expire the protection after a certain time are also negotiable.

Question 5

What are pay-to-play provisions?

Accepted Answer

Pay-to-play requires investors to participate in the down round (invest their pro-rata share) to maintain their anti-dilution protection. If they do not participate, their preferred shares convert to common stock, eliminating their anti-dilution rights and liquidation preference. This aligns investor incentives with company survival.

Question 6

How common are down rounds?

Accepted Answer

Down rounds peaked at about 20% of all rounds in 2023 during the post-ZIRP correction. In normal markets, 5-10% of rounds are down rounds. They are more common at later stages where the valuation gap between rounds is larger and expectations are harder to meet.

Type	How It Works	Severity	When Common
Full Ratchet	Conversion price drops to the new round price regardless of round size	Severe	Aggressive investors, bridge rounds, distressed companies
Broad-Based WA	Weighted average using all outstanding shares in the formula	Moderate	Market standard for Series A and beyond
Narrow-Based WA	Weighted average using only preferred shares (smaller denominator)	High	Less common; slightly more investor-friendly than broad-based
None	No price adjustment; investor takes the full dilution hit	None	Rare; sometimes negotiable at seed stage or with founder-friendly investors

Anti-Dilution Provisions Explained

Original Round

Down Round

Scenario Comparison

No Protection

Broad-Based Weighted Avg

Full Ratchet

Anti-Dilution Provision Comparison

What Founders Can Negotiate

Push for Broad-Based Weighted Average

Carve-Outs for Employee Grants

Pay-to-Play Provisions

Sunset Clauses

Frequently Asked Questions