Quick facts
- What triggers them: issuing shares below the price a prior round paid
- Market standard: broad-based weighted average
- Aggressive version: full ratchet
- Who pays: common stock, meaning founders and employees
Anti-dilution provisions protect investors against a drop in share price. If you later sell shares more cheaply than an earlier round paid, the provision lowers the price at which that earlier round's preferred stock converts into common stock, which gives those investors more shares than they bought.
The extra shares are not created out of nothing. They come out of everyone else's percentage.
In plain English
This protection is about price, not percentage. Every shareholder gets diluted when you issue new shares, and that is normal. Anti-dilution addresses something narrower: the case where the new shares are cheaper than what an earlier investor paid.1 The remedy is to retroactively treat that investor as though they had paid the lower price.
Delaware law is what makes this possible. A corporation can set the conversion rights of a series of preferred stock in its certificate of incorporation, and those terms can include a conversion price that adjusts on later issuances.3 The adjustment is not a negotiation when it happens. It is a formula that has been sitting in your charter since the round closed.
Full ratchet
The harsh version. The earlier investor's conversion price drops all the way to the new, lower price, no matter how few shares you sold at it.
Full ratchet is generally advised against outside distressed or restructuring situations.1 If you are being offered it in an ordinary round, that is worth naming out loud.
Broad-based weighted average
The standard version, and the one you should expect.1 The conversion price falls only partly, in proportion to how much cheap stock you actually issued. A small down round barely moves it. A large one moves it a lot.
The formula is:
new price = old price × (A + B) ÷ (A + C)
- A is the fully diluted shares outstanding before the new round
- B is the number of shares the new money would have bought at the old price
- C is the number of shares the new money actually bought
"Broad-based" refers to what goes into A. The broad version counts all common stock equivalents, including options and the option pool, which makes the denominator larger and the adjustment gentler.2 The narrow version counts only outstanding preferred, which makes the adjustment sharper. One word in your charter, and the gap is real money.
The same down round, two structures
A company has 10,000,000 fully diluted shares. Series A bought at $1.00 per share, and one investor put in $1,000,000 for 1,000,000 shares. The company now raises $2,000,000 at $0.50 per share, issuing 4,000,000 new shares.
Under broad-based weighted average:
- A = 10,000,000, B = $2,000,000 ÷ $1.00 = 2,000,000, C = 4,000,000
- new price = $1.00 × 12,000,000 ÷ 14,000,000 = $0.857
- the investor's $1,000,000 now converts into 1,166,667 shares, a gain of 166,667
Under full ratchet:
- new price drops to $0.50
- the investor's $1,000,000 now converts into 2,000,000 shares, a gain of 1,000,000
Same down round. One structure gives the investor 167,000 extra shares, the other gives a million. Both come out of the common stock percentage, which means out of you and your team.
Pay-to-play
A pay-to-play provision says an investor keeps its protection only if it puts money into the down round. Investors who sit it out lose anti-dilution rights, and sometimes convert to common stock and lose their other preferred rights too.
This is not rare, and it becomes more common when the market turns. Cooley reported pay-to-play provisions in 10.1% of deals in the third quarter of 2025, up from 9.7% the quarter before, with down rounds at 19.9% of deals.2 If roughly one deal in five is a down round, the anti-dilution formula in your charter is not a hypothetical.
Sunsets and fall-aways
Protection does not have to last forever. A sunset or fall-away provision ends it, either on an event such as a later qualified financing at a higher valuation, or simply after a set period.1 The purpose is to give investors reasonable downside protection without leaving founders permanently carrying legacy rights.
Ask for one. It is a smaller fight than the formula itself and it is often winnable.
What is usually carved out
Most provisions exclude ordinary issuances that should not count as cheap stock: employee option grants, shares issued in an acquisition, and shares issued to lenders or strategic partners. Check that your option pool is on that list, or every hire will nudge the conversion price.
What to negotiate
Broad-based weighted average rather than narrow-based, and never full ratchet in a healthy round. A sunset. Carve-outs that cover your equity compensation. Pay-to-play is worth accepting, because it costs you nothing if your investors support the company and it costs them their protection if they do not.
What to do next
Find the anti-dilution section of your certificate of incorporation and identify three things: whether it is weighted average or ratchet, whether it is broad or narrow, and whether it ever expires. Then run the formula above at a price half your last round. That number is what the clause is worth, and it is better learned on a quiet afternoon than in a term sheet negotiation.
Related reading
- Down Round covers the event that triggers these provisions
- Liquidation Preference covers the other preferred term that moves value away from common
- Cap Table covers where the adjustment shows up
- SAFE covers an instrument that usually lacks this protection