Deal Terms & Term Sheets
What is anti-dilution protection in venture capital?
Anti-dilution protection adjusts an investor's share price downward if the company later raises money at a lower valuation, protecting the investor from being diluted by a down round.
Anti-dilution provisions protect early investors when a company raises a subsequent funding round at a lower valuation than the previous round — known as a down round.
Without anti-dilution protection, if you invested at a $50M valuation and the company later raises at a $25M valuation, your ownership percentage stays the same but your shares are now worth less. Anti-dilution clauses adjust (reset) your conversion price so you effectively receive more shares to compensate for the reduced valuation.
There are two main types:
Full ratchet anti-dilution is the most aggressive. If a single share is sold at a lower price, the investor's conversion price resets to that lower price — regardless of how many shares are sold at that price. This can be devastating to founders and employees because it massively increases the number of shares outstanding.
Weighted average anti-dilution is far more common and founder-friendly. It adjusts the conversion price based on both the lower price AND the number of shares issued at that price. This softens the impact. Broad-based weighted average (which includes all outstanding shares in the calculation) is more founder-friendly than narrow-based weighted average.
In today's market, broad-based weighted average anti-dilution is the standard. Full ratchet is a red flag — avoid it if you can.
Related glossary terms
Related questions
What is a liquidation preference?
A liquidation preference gives investors the right to receive their money back before common stockholders (founders and employees) get paid in any sale or liquidation of the company.
What is a down round?
A down round is a funding round where a company raises capital at a lower valuation than its previous round. It dilutes existing shareholders and triggers anti-dilution provisions for preferred investors.
What is a cap table?
A cap table (capitalization table) is a spreadsheet or document that shows who owns what percentage of a company — founders, employees, investors — accounting for all shares, options, and convertible instruments.