Deal Terms
Anti-Dilution
Last updated
Quick Answer
A contractual protection for investors that adjusts their ownership percentage (or conversion price) if the company later raises money at a lower valuation.
What it is
Anti-dilution provisions protect investors from the value erosion that occurs when a company issues new shares at a price lower than what the investor originally paid — known as a down round. The protection works by adjusting the investor's conversion price downward, effectively giving them more shares to compensate.
There are two main types: full ratchet, which is the most aggressive and adjusts the conversion price all the way down to the new round's price, and weighted average, which is more common and more founder-friendly, calculating a blended conversion price based on the number of shares issued at the lower price relative to total shares outstanding.
In Practice
A Series A investor paid $2 per share. The company later raises a down round at $1 per share. With weighted average anti-dilution, the investor's conversion price adjusts to roughly $1.50 — they get more shares than originally issued, partially compensating for the valuation drop.
Operational context
What good looks like
The term is tied to a real workflow, not just a definition.
Ownership, timing, and evidence are clear.
The reader can tell what decision the concept supports.
Related terms point to the next useful explanation.
Why It Matters
Anti-dilution is one of the most consequential terms in a VC term sheet. In a down round, full ratchet anti-dilution can be devastating for founders and employees — significantly concentrating ownership among protected investors. Weighted average is the market standard and strikes a fairer balance.
VC Beast Take
Anti-dilution is where the friendly investor-founder relationship gets stress-tested. In good times, nobody thinks about it. In a down round, it becomes the most important clause in the deal. Full ratchet anti-dilution is a nuclear option — it reprices an investor's entire position to the new lower price, massively diluting founders and employees. Most sophisticated VCs avoid full ratchet because it creates misaligned incentives: if a company needs a bridge at a lower price, full ratchet makes existing investors' positions so much better that they may be less motivated to help the company recover. Weighted average is the standard precisely because it's proportional — the adjustment reflects the relative size of the down round, not a blanket repricing. Founders should negotiate for broad-based weighted average and resist any investor pushing for narrow-based or full ratchet.
Related tools and reading
Term Family
Related concepts
Further Reading
VC Term Sheet Template & Guide: Every Clause Explained with Examples
A clause-by-clause breakdown of every standard VC term sheet provision — what each term means, what's market, what to negotiate, and the red flags that cost founders millions.
Share Dilution Explained: Formula, Examples, and How to Protect Your Equity
The dilution formula every founder needs to know, three worked examples from simple to multi-round, how option pools really work, and practical strategies to protect your ownership stake.
NVCA Model Legal Documents: Every Form a Startup Founder Needs
The NVCA publishes free legal templates that can save you $10-30K in lawyer fees. Here's every document explained in plain English, plus what to watch for.
Startup Valuation Calculator: How to Calculate Pre-Money and Post-Money Valuation
Pre-money valuation doesn't have to be a mystery. Here are the exact formulas, three worked examples at different stages, and the methods VCs actually use to price early-stage startups.
How to Write an Investment Memo (VC Template and Examples)
The investment memo is the core deliverable in VC. Most are mediocre. Here's the section-by-section template top funds actually use, with examples of what good vs. bad looks like.
SAFE vs Convertible Note vs Priced Round: Which One Should You Use?
SAFEs, convertible notes, and priced rounds each have tradeoffs. Here's when to use each, with worked examples showing exactly what they cost you in dilution.
Comparisons
Related Questions
What is a cap table and why does it matter?
A cap table (capitalization table) is a spreadsheet showing who owns what percentage of a company, including all shareholders, option holders, and warrant holders.
What is a down round and what does it mean for a startup?
A down round is when a startup raises new funding at a lower valuation than its previous round, signaling financial distress and triggering dilution for earlier investors and employees.
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 term sheet in venture capital?
A term sheet is a non-binding document outlining the key terms and conditions of a proposed investment, serving as the basis for negotiating a final deal.
Careers That Use This Term
This concept is especially relevant for these venture capital roles:
Frequently Asked Questions
What is Anti-Dilution in venture capital?
Anti-dilution provisions protect investors from the value erosion that occurs when a company issues new shares at a price lower than what the investor originally paid — known as a down round.
Why is Anti-Dilution important for startups?
Understanding Anti-Dilution is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
What category does Anti-Dilution fall under in VC?
Anti-Dilution falls under the deal-terms category in venture capital. This area covers concepts related to the financial and legal terms that define investment agreements.
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