Anti-dilution protection, explained
If a company later raises money at a lower valuation than your round, anti-dilution protection adjusts your conversion price to soften the blow. How much it softens it depends entirely on which version is in your documents.
The basics
When it applies
Anti-dilution protection only triggers on a "down round" — a future financing at a lower price per share than your round. It has no effect if the company’s valuation only ever goes up.
Broad-based weighted average
The standard, founder-friendly version. It adjusts your conversion price based on both the size of the down round and the company’s total share count — a moderate, proportional adjustment.
Full ratchet
The aggressive, rare version: your conversion price resets straight to the new, lower round price, regardless of how small that round was. Punishing for founders and existing common shareholders — a real red flag if proposed at a normal seed round.
A simplified comparison
An investor’s shares originally converted at $1.00/share. The company later raises a down round at $0.50/share.
| Protection type | New effective conversion price | Resulting adjustment |
|---|---|---|
| None | $1.00 (unchanged) | Investor fully absorbs the down round like everyone else |
| Broad-based weighted average | Somewhere between $0.50 and $1.00 | Partial protection, proportional to round size |
| Full ratchet | $0.50 | Investor made whole as if they had invested at the new low price |
Simplified — the exact broad-based weighted-average number depends on a specific formula involving shares outstanding before and after the down round.
What this means in practice
Broad-based weighted average is the market standard today precisely because it balances investor protection with fairness to founders and other shareholders — it softens a down round without fully insulating the investor from it.
If you see full ratchet protection in a term sheet at a normal seed or Series A round, treat it as a signal worth investigating — it usually shows up in distressed financings or when an investor has unusual negotiating leverage, not in a healthy, well-subscribed round.