Deal Terms
Narrow-Based Weighted Average
A less founder-friendly anti-dilution formula that only counts preferred shares in the denominator, resulting in greater conversion price adjustments in down rounds.
Narrow-based weighted average anti-dilution uses a formula that only includes outstanding preferred shares (not common shares or the option pool) in the denominator when calculating the adjusted conversion price in a down round. This results in a more aggressive price adjustment than broad-based weighted average because the smaller denominator amplifies the impact of the new cheaper shares on the conversion price.
In Practice
Under the narrow-based formula, the Series A conversion price dropped from $10 to $7.50 in the down round — compared to $8.50 that would have resulted from broad-based weighted average — because the formula excluded 5M common shares and a 2M-share option pool from the denominator.
Why It Matters
The difference between narrow-based and broad-based weighted average can represent millions of dollars in additional dilution for common shareholders. Founders should always negotiate for broad-based, and the presence of narrow-based in a term sheet is a yellow flag about the investor.
VC Beast Take
Narrow-based weighted average is relatively rare in modern VC term sheets, but it occasionally appears from investors who either don't know the market standard or are intentionally pushing aggressive terms. If you see it, push back — switching to broad-based is one of the easiest term sheet negotiations to win.
Further Reading
How to Negotiate a Term Sheet as a First-Time Founder
Your first term sheet is exciting and terrifying. Know what's negotiable, what's standard, and the practical tactics for pushing back on liquidation preferences, board seats, and protective provisions.
How to Read a Term Sheet: A Practical Breakdown
Term sheets aren't designed to be readable. Here's a section-by-section guide to what matters, what's standard, and what should make you walk away.
Anti-Dilution Provisions Explained: What Every Founder Needs to Know
How anti-dilution provisions work in venture capital — full ratchet vs. weighted average, how they affect founder ownership in down rounds, and what to negotiate in your term sheet.
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