Definition
Anti-dilution provisions adjust the price per share of earlier investors when a company raises capital at a lower valuation (a 'down round'). Full ratchet is investor-friendly; weighted average is standard. GitDealFlow's signals can help VCs anticipate down rounds by detecting engineering momentum declines.
How it works in practice
Anti-dilution provisions protect investors when a company raises a later round at a lower price than they paid — a down round. They adjust the investor's conversion price downward, so the investor's shares convert into more shares and the investor's ownership is partially protected. The cost of that protection lands on the other shareholders: founders, employees, and investors without the clause.
The two main mechanisms differ sharply. Full ratchet resets the investor's conversion price to the new round's price, no matter how small the down round — the strongest protection and the most punitive to everyone else. Weighted average (broad-based or narrow-based) adjusts the price by a formula that accounts for how much was raised and at what price — the standard, because it balances protection with fairness. Broad-based weighted average, which includes all shares in the formula, is the common market default.
Anti-dilution only matters in bad outcomes, but it matters enormously then: in a severe down round, full ratchet can wipe out most of the common holders' ownership. Founders should understand which mechanism they are signing before the cap table is tested. GitDealFlow's engineering signals — declining commit velocity, contributor growth, and repository expansion across the public GitHub activity of 4,200+ startups — can help investors anticipate a down round early, when there is still time to fix the trajectory.
Key points
- Anti-dilution adjusts investor conversion prices when a later round prices lower.
- Full ratchet resets to the new price — maximum investor protection, maximum common dilution.
- Weighted average adjusts by formula; broad-based is the standard.
- The protection's cost lands on founders, employees, and unprotected investors.
- Down rounds rarely arrive without warning in the data.
Frequently Asked Questions
What's the difference between full ratchet and weighted average?
Full ratchet: early investor's price adjusts to the new lower price, causing maximum dilution to other shareholders. Weighted average: adjusts based on the size of the new round, more founder-friendly.
What is a down round?
A financing round priced below the valuation of the previous round — the company's value has fallen, and new investors pay less per share than earlier ones. Down rounds trigger anti-dilution adjustments, dilute existing holders, and can include other protective terms. They are a signal of distress, though sometimes a deliberate reset when the market turns.
When does anti-dilution protection trigger?
When a later round's price per share is lower than the protected investor's conversion price — the definition of a down round. The adjustment is computed when the new round closes, using the mechanism in the agreement (full ratchet or weighted average). Some agreements also treat certain financings, like deeply discounted rounds, as triggering events even if not strictly priced lower.
How does anti-dilution affect founders?
The protected investors' price adjustment means their money buys more shares, which dilutes everyone who is not protected — most heavily the common holders: founders and employees. In an extreme case with full ratchet and a deep down round, common ownership can be reduced dramatically. This is why founders negotiate for broad-based weighted average and understand the clause before they ever need it.