Term sheets and priced rounds
Anti-Dilution Protection: Broad-Based Weighted Average vs Full Ratchet (With Examples)
The short answer
Anti-dilution protection adjusts the price at which preferred stock converts into common if the company later sells shares at a lower price (a down round). The market standard is broad-based weighted average, which lowers the conversion price in proportion to how much stock is sold and at what discount, counting all outstanding shares and options in the base. Full ratchet, which resets the conversion price to the new lower price regardless of size, is off-market and can transfer large amounts of ownership from founders to investors. Down rounds were 12.1% of deals in Cooley's Q2 2026 report.
Key numbers
| Item | 2026 market or figure | Source |
|---|---|---|
| Standard formula | Broad-based weighted average | NVCA model documents; Series Seed; Venture Deals |
| Full ratchet | Rare; off-market at seed and Series A | Venture Deals; practice |
| Down rounds | 12.1% of deals | Cooley, Q2 2026 |
| Up rounds | 83.6% of deals | Cooley, Q2 2026 |
| Pay-to-play provisions | 8.4% of deals | Cooley, Q2 2026 |
| Weighted average formula | NCP = OCP x (A + B) / (A + C) | NVCA convention |
How the adjustment works
Preferred stock converts into common at a ratio equal to the original purchase price divided by the conversion price. At issuance both are the same, so the ratio is 1:1. Anti-dilution protection lowers the conversion price after a dilutive issuance, so each preferred share converts into more common shares. No new preferred shares are issued; the adjustment shows up in the conversion ratio and therefore in fully diluted ownership and voting.
The weighted average formula
NCP = OCP x (A + B) / (A + C)
- NCP: new conversion price
- OCP: old conversion price (before the down round)
- A: shares outstanding before the new issuance. In the broad-based version this includes all common, all preferred as converted, and all outstanding options, warrants and often the unissued pool. In the narrow-based version it includes only outstanding shares (definitions vary).
- B: shares the new money would have bought at the old price (new money / OCP)
- C: shares actually issued in the new round
The larger A is, the smaller the adjustment. That is why broad-based favors founders.
Worked example
Before the down round. Acme has 10,000,000 fully diluted shares: 6,500,000 held by founders, 2,000,000 shares of Series A preferred bought at $2.00 ($4,000,000), and 1,500,000 options and pool.
Down round. Series B: 2,000,000 new shares at $1.00 ($2,000,000).
Broad-based weighted average - A = 10,000,000; B = $2,000,000 / $2.00 = 1,000,000; C = 2,000,000 - NCP = $2.00 x 11,000,000 / 12,000,000 = $1.8333 - Conversion ratio = $2.00 / $1.8333 = 1.0909, so Series A converts into 2,181,818 common shares (181,818 more)
Narrow-based weighted average (A = 8,500,000 outstanding shares, excluding options and pool) - NCP = $2.00 x 9,500,000 / 10,500,000 = $1.8095 - Series A converts into 2,210,526 shares (210,526 more)
Full ratchet - NCP = new price = $1.00 - Series A converts into 4,000,000 shares (2,000,000 more)
Effect on founders' fully diluted ownership after the Series B
| Scenario | Total FD shares | Founders |
|---|---|---|
| No anti-dilution | 12,000,000 | 54.2% |
| Broad-based weighted average | 12,181,818 | 53.4% |
| Narrow-based weighted average | 12,210,526 | 53.2% |
| Full ratchet | 14,000,000 | 46.4% |
A full ratchet would have cost the founders about 7 percentage points more than the market formula, from the sale of just 2,000,000 shares. And full ratchet applies even if the company sells a single share at a lower price.
Carve-outs: issuances that do not trigger an adjustment
Standard "exempted securities" include:
- Options and shares issued to employees, directors and consultants under the approved equity plan.
- Shares issued on conversion of preferred stock, SAFEs or notes, and on exercise of outstanding options and warrants.
- Shares issued in board-approved acquisitions, strategic partnerships, equipment leases and bank financings.
- Stock splits and dividends (these are handled by a separate proportional adjustment).
- Any issuance that the required preferred holders agree to exempt.
Founders should also ask that a majority of each series (or of all preferred) can waive the adjustment for everyone. In a down round led by existing investors, a waiver is often negotiated as part of the deal.
Pay-to-play: anti-dilution with conditions
Pay-to-play provisions require investors to take part in future rounds (usually their pro rata share) to keep their preferred rights. An investor that does not "play" may have its preferred converted into common or into a series without anti-dilution protection. Moderate versions are seen as healthy for the company because they encourage insiders to support it. Harsh versions, combined with a recapitalization at a very low price, can punish small angels and seed funds that do not have reserves.
Founder checklist
- Insist on broad-based weighted average at seed and Series A.
- Read the definition of A: it should include options, warrants and the pool.
- Get a full list of carve-outs and a waiver mechanism.
- Reject anti-dilution tied to missed revenue or product milestones.
- Reject "non-dilution" rights that guarantee an investor a fixed percentage regardless of price; offer a pro rata right instead.
- Remember that SAFEs and notes usually have no anti-dilution protection; their protection is the cap.
Down rounds beyond the formula
A down round also resets the option strike price (a new 409A valuation), may trigger pay-to-play, can require consents from existing preferred holders and raises fiduciary issues when insiders lead it. Process protections include approval by disinterested directors and a rights offering that lets all existing investors participate on the same terms.
Founder, market and investor positions
| Issue | Founder-friendly | Market | Investor-friendly |
|---|---|---|---|
| Formula | Broad-based weighted average with a wide base | Broad-based weighted average | Full ratchet or narrow-based |
| Base (A) | All shares, options, warrants and the full unissued pool | All outstanding shares, options and warrants | Outstanding preferred only |
| Carve-outs | Long list plus waiver by a majority of all preferred | Standard exempted securities | Few carve-outs |
| Duration | Ends at IPO or sale | Same | Same, plus price resets on missed milestones (resist) |
When reviewing a draft, check the definition of "Additional Shares of Common Stock" and the list of "Exempted Securities" in the charter: these two definitions decide when the formula applies at all.
Key takeaways
Anti-dilution only matters if the company raises money at a lower price, but the formula you accept at seed or Series A will usually be copied into every later round, so it is worth getting right early. Accept broad-based weighted average, check the definitions behind it, keep a waiver mechanism, and remember that the best protection against a down round is raising at a valuation the company can grow into. When a down round does happen, the adjustment is one item in a broader negotiation that also covers new money, pool refresh, founder retention and consents.
Frequently asked questions
What is broad-based weighted average anti-dilution?
An adjustment that lowers the preferred stock's conversion price after a down round using a weighted average of the old and new prices, counting all outstanding shares, options and warrants in the base. It is the market standard.
What is a full ratchet?
An adjustment that resets the conversion price to the new, lower price, regardless of how many shares were sold. It is rare and investor-favorable.
Does anti-dilution protect against all dilution?
No. It applies only to issuances below the investor's price. Normal dilution from new rounds at higher prices and from option grants is not covered.
Do SAFEs have anti-dilution protection?
Not in the usual sense. A post-money SAFE fixes the holder's percentage against later SAFEs, but there is no price-based adjustment after conversion beyond what the preferred stock received in conversion provides.
Who bears the cost of an anti-dilution adjustment?
The holders who do not have the protection: mainly common stockholders (founders and employees) and any preferred series without it.
Can anti-dilution be waived?
Yes. Charters usually allow the required preferred holders to waive an adjustment, which is common in negotiated down rounds.