Deal Terms
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.
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.
What good looks like
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.
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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.
This concept is especially relevant for these venture capital roles:
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.
Understanding Anti-Dilution is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
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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