Anti-dilution provisions are among the most consequential — and most negotiated — terms in any venture investment. They protect investors from the economic damage of a down round (raising money at a lower valuation than a previous round).
How anti-dilution works
When a company raises a down round, it issues new shares at a lower price per share than the previous round. This hurts earlier investors twice: their ownership percentage shrinks (dilution) and the implied value per share drops (economic loss). Anti-dilution provisions adjust the conversion price of earlier investors' preferred stock downward, giving them more shares upon conversion to compensate.
The two main types
1. Full ratchet anti-dilution
The investor's conversion price is reset to the price of the new round, regardless of how many shares are issued in the down round. This is the most aggressive form and heavily favors investors.
2. Weighted average anti-dilution (most common)
The conversion price adjustment is weighted by the size of the down round relative to total shares outstanding. Two variants exist:
- Broad-based weighted average — includes all outstanding shares (options, warrants, convertibles) in the formula; more founder-friendly
- Narrow-based weighted average — counts only common and preferred shares; more investor-friendly
2026 market norms
Broad-based weighted average anti-dilution is the market standard for most VC investments. Full ratchet is rare except in distressed situations. Down rounds in 2023–2025 made anti-dilution provisions highly relevant — founders should understand the terms before signing.