Full Ratchet vs Weighted Average Anti-Dilution: Key Differences Explained

Full ratchet is the most aggressive form of anti-dilution protection. If a company issues new shares at a lower price than the preferred stock in a prior round (a 'down round'), full ratchet reprices the earlier investor's conversion price all the way down to the new, lower price — as if they had invested at the new price. This means the earlier investor gets a proportionally larger slice of the company, heavily diluting the founders and common shareholders. For example: an investor who paid $5/share in Series A gets full ratchet protection. The company then raises a down round at $2/share. Full ratchet reprices the Series A investor's conversion to $2/share — effectively doubling their share count at founders' expense. Full ratchet is increasingly rare in competitive markets and is often a signal of weak negotiating position. The formula could not be simpler, which is exactly the problem: under full ratchet, the new conversion price equals the price per share of the dilutive issuance — CP2 = new round price — regardless of whether the down round raised $50,000 or $50,000,000. Protection operates through the conversion ratio: each preferred share converts into (original issue price ÷ conversion price) common shares, so cutting the conversion price in half doubles the investor's as-converted share count without another dollar invested. The size-insensitivity is the toxic feature — a tiny bridge priced low reprices the entire prior round.

Weighted average anti-dilution is the market standard. When a down round occurs, the conversion price of earlier preferred shares is adjusted downward — but the adjustment accounts for both the size of the down round and the amount of new shares issued. The formula considers the total shares outstanding and the size of the dilutive issuance. Broad-based weighted average (which counts all common shares, options, and warrants in the denominator) is more founder-friendly than narrow-based (which counts only preferred shares). Weighted average creates a fair compromise: earlier investors are partially protected from down-round dilution, but the protection is proportional to how dilutive the round actually is. The smaller the down round, the smaller the conversion price adjustment. The broad-based weighted average formula is: CP2 = CP1 × (A + B) ÷ (A + C), where CP1 is the existing conversion price, A is the fully diluted share count before the new issuance (common, preferred as-converted, options, and warrants), B is the number of shares the new money would have bought at the old price (new investment ÷ CP1), and C is the number of shares actually issued in the down round. Narrow-based weighted average uses the same formula but shrinks A — typically to outstanding preferred only — and the smaller base produces a lower CP2 and more investor protection from identical facts. The definition of A is therefore a negotiation point in its own right: the broader the base, the gentler the adjustment.

Weighted average is the only acceptable standard for companies that expect to stay venture-backed. If an investor insists on full ratchet, it's either a sign they have outsized leverage or they're unsophisticated — either way, it's worth pushing back hard. The right protection is broad-based weighted average, and the right carve-outs are employee option pool issuances and small strategic investments. When you model a term sheet, run the anti-dilution clause against a hypothetical 50% down round before you sign, exactly as above. The clause costs nothing at signing and only binds in a bad state of the world — which is precisely when you will have the least leverage to renegotiate it. Price the bad state now.

A company raised $5M at a $20M post-money (Series A, $1/share). The business struggles and raises a $1M down round at $0.40/share. With full ratchet: the Series A investor's conversion price drops to $0.40 — their 5M shares become the equivalent of 12.5M shares. Founders are massively diluted. With broad-based weighted average: the formula accounts for the small size of the down round — the new conversion price might be $0.75/share, giving the Series A investor fewer extra shares. The weighted average approach preserves some value for founders and makes it easier to attract new investors to the down round. To see the mechanics to the cent, run one down round both ways on a clean cap table. Series A: $4,000,000 at $2.00 per share buys 2,000,000 preferred shares; fully diluted capitalization after the round is 10,000,000 shares (8,000,000 common and options, 2,000,000 preferred). The company then raises $2,000,000 at $1.00 per share — 2,000,000 new shares, a 50% down round. Full ratchet: CP2 = $1.00; each Series A share now converts at $2.00 ÷ $1.00 = 2.0x, so the Series A converts into 4,000,000 shares. Broad-based weighted average: A = 10,000,000; B = $2,000,000 ÷ $2.00 = 1,000,000; C = 2,000,000. CP2 = $2.00 × (10,000,000 + 1,000,000) ÷ (10,000,000 + 2,000,000) = $2.00 × 11/12 ≈ $1.83. Conversion ratio $2.00 ÷ $1.8333 ≈ 1.0909, so the Series A converts into 2,181,818 shares — an extra 181,818 shares, versus an extra 2,000,000 under full ratchet. Founder impact: post-round fully diluted is 14,000,000 shares under full ratchet (common holds 8,000,000 ÷ 14,000,000 = 57.1%) versus 12,181,818 under broad-based weighted average (common holds 8,000,000 ÷ 12,181,818 = 65.7%). Same down round, an 8.5-point swing in common ownership — that difference is the entire negotiation.