What is anti-dilution protection? Definition, how it works and examples
What happens to an earlier investor in a down round — how full-ratchet and broad-based weighted-average formulas reset the conversion price, and who pays for it.
The short answer
What is anti-dilution? Anti-dilution protection is a clause in a company’s certificate of incorporation that lowers a preferred series’ conversion price when the company later sells shares for less than that series paid, so each preferred share converts into more common stock and the investor recovers part of the value a down round takes away. The extra shares are not free. They come out of everyone who does not have the clause — founders, employees with options, common stock bought on the secondary market, and earlier or later series without it.
What is an anti-dilution clause, and where is the provision written?
Each preferred share converts into common at a ratio: its original issue price divided by its conversion price. At issue the two are equal, so one preferred share converts into one common share. The anti-dilution provision is the rule that lowers the conversion price after a cheaper issue. A lower conversion price means a higher ratio — more common per preferred share. The clause lives in the certificate of incorporation, because under Delaware law a class has the rights the certificate states (DGCL §151(a)).
Full ratchet vs broad-based vs narrow-based weighted average
The NVCA model gives the broad-based weighted-average formula as CP2 = CP1 × (A + B) ÷ (A + C), rounded to the nearest hundredth of a cent, where: CP1 / CP2 The series’ conversion price immediately before / after the new issue. A Common outstanding before the issue, counting as outstanding every share issuable on outstanding options and convertible securities — including the preferred itself. B The shares the new money would have bought at CP1: the amount raised divided by CP1. C The new shares actually issued.
A down round with anti-dilution, worked through
A company has 6,000,000 common shares, 1,000,000 options granted, 1,000,000 unallocated in the pool, and 2,000,000 Series A preferred bought at $5.00 for $10M. It then raises $6M in a Series B at $3.00, issuing 2,000,000 shares. Series A is protected. B = $6M ÷ $5.00 = 1,200,000; C = 2,000,000. Read the last row. A full ratchet makes the Series A whole on an as-converted basis: $10M invested, $10M at the new price. Broad-based weighted average recovers $470,000 of the $4M markdown.
Carve-outs, waivers and pay-to-play
Not every cheap share triggers an adjustment. The NVCA model lists Exempted Securities that never count, each of them negotiable. Dividends on the preferred, and stock splits and dividends on the common, adjusted for separately. Shares and options for employees, directors and consultants under a plan approved by the board. Shares issued when options are exercised or convertible securities convert on their terms. Shares for lenders, equipment and property lessors, suppliers, acquisitions and strategic partnerships — often subject to board approval or a share cap.
Anti-dilution for employees, secondary buyers and SPV investors
If you hold common — founders’ stock, exercised options, shares bought from an employee — you pay for every adjustment and receive none. If you hold through a vehicle, what matters is the class the vehicle owns: a block of a protected preferred series carries the clause; a block of common does not. The adjustment also matters only if the preferred converts — at an IPO, or in a sale where converting beats taking the liquidation preference. The share classes themselves are compared on common stock vs preferred stock, and how a vehicle’s holding is valued is in how valuations are updated.
The anti-dilution provisions that apply, as of October 2026
Common mistakes Assuming it protects every investor It protects one series. Common, and series without it, pay for it. Ignoring the definition of A Whether options, the pool and the preferred count changes the result. Treating full ratchet as a weighted average A tiny issue can trigger the whole reset. Forgetting the carve-outs Many cheap issues, such as employee grants, are exempt by design. Missing pay-to-play Sitting out a round can cost the protection and the preference together. Buying common and expecting the round’s terms Secondary common carries none of the preferred’s rights.
The terms this page uses
Anti-dilution protection A charter clause lowering a preferred series’ conversion price after a cheaper issue of shares. Conversion price The price used to convert preferred into common; original issue price ÷ conversion price = common per share. Down round A financing priced below an earlier round. Broad-based weighted average The formula adjustment counting options and convertibles in A. The NVCA default. Narrow-based weighted average The same formula with a smaller A, giving a larger adjustment.
What people ask about anti-dilution
What is anti-dilution protection, in one sentence? It is a right of a preferred series to convert into more common shares if the company later sells stock more cheaply, so that series bears less of a down round and everyone else bears more. Does anti-dilution protect against all dilution? No. It is triggered only by issues below the series’ conversion price, and not by the exempted ones. A round at a higher price dilutes a protected investor’s percentage exactly like anyone else’s. Which is more common, full ratchet or weighted average?
What is anti-dilution protection, in one sentence?
It is a right of a preferred series to convert into more common shares if the company later sells stock more cheaply, so that series bears less of a down round and everyone else bears more.
Does anti-dilution protect against all dilution?
No. It is triggered only by issues below the series’ conversion price, and not by the exempted ones. A round at a higher price dilutes a protected investor’s percentage exactly like anyone else’s.
Which is more common, full ratchet or weighted average?
The NVCA model drafts broad-based weighted average as its main form and offers full ratchet as an alternative, optionally limited in time. Because a full ratchet resets on any cheaper issue, however small, it is by far the more expensive clause for everyone else.
Who pays for anti-dilution protection?
Every holder without it: founders and employees through their common and options, unprotected series, and the new investor, whose percentage also falls. The table on this page shows each.
Can a company avoid the adjustment in a down round?
Yes, if the required preferred holders waive it in writing — something a new investor may make a condition of investing. Otherwise the charter applies, unless the new shares fall in an exempted category.
Where the provisions on this page come from
Provisions were last verified on 2 October 2026 against the NVCA model certificate of incorporation of October 2025, read in full. The example is illustrative and describes no real company. The simpler introduction, with a Series C example, is on dilution; actual charters vary, and the one that governs your shares is the one to read.