Anti-dilution protection
Mechanism that protects preferred holders from dilution in a down round. Two main types: full ratchet and weighted average.
| Full ratchet | Most aggressive, conversion price drops to the new lower price |
|---|---|
| Broad-based weighted average | Most common, adjustment based on size of new issuance vs. total outstanding |
| Narrow-based weighted average | Adjustment based on a smaller share count, more aggressive than broad-based |
| No anti-dilution | Rare in priced rounds; common in SAFEs |
Full ratchet: simple and aggressive
Under a full-ratchet anti-dilution provision, if any new shares are issued at a price below the preferred holder's original conversion price, the preferred holder's conversion price is reset to the new lower price, regardless of how few or many new shares are issued. A $10M Series A preferred holder who paid $10/share would, if the corporation later issued one share at $1, have their conversion price reset to $1, effectively multiplying their share count tenfold.
This is rare in modern venture financing because it is punitive to founders and common holders. Founders push back hard against full ratchet, and most counsel will resist agreeing to it on a corporation's behalf.
Weighted average: the market standard
Weighted average anti-dilution adjusts the conversion price using a formula that accounts for both the price decline and the size of the new issuance:
New conversion price = Old × (A + B) / (A + C)
Where A = shares outstanding before the new issuance, B = consideration received divided by old conversion price, and C = number of new shares actually issued.
The formula produces a smaller adjustment when the new issuance is small relative to outstanding shares, and a larger adjustment when the new issuance is large. This is fairer than full ratchet because it reflects the actual dilutive impact rather than just the price change.
Broad-based weighted average uses fully diluted shares as 'A', producing a milder adjustment. Narrow-based uses only outstanding preferred, producing a more aggressive adjustment. Broad-based is the current US market standard.
Standard carve-outs
Anti-dilution provisions typically exclude certain issuances from triggering an adjustment:
- Shares issued under board-approved equity incentive plans (up to a defined pool size)
- Shares issued in connection with M&A or strategic transactions
- Shares issued as conversion of existing convertible instruments (SAFEs, notes)
- Shares issued as stock splits, dividends, or recapitalizations
- Shares issued under specific board-approved transactions (with preferred-holder consent)
Octelligence captures anti-dilution provisions per share class and recalculates conversion ratios automatically when a triggering issuance occurs. Scenario modelling shows the dilutive impact of a hypothetical down round on every protected class.
See cap table scenariosClass-specific anti-dilution, recalculated automatically at every issuance.