Deal Terms
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Quick Answer
The most common form of anti-dilution protection, adjusting an investor's conversion price based on both the new lower price and the number of shares issued.
Weighted average anti-dilution is the standard form of anti-dilution protection in VC deals. When a company raises a down round, weighted average anti-dilution adjusts the conversion price of existing preferred stock based on: how many shares were sold at the lower price AND what that lower price is. The formula weighs the impact, meaning a small down round with few shares issued has a modest adjustment, while a large down round with many shares issued has a bigger adjustment. Broad-based weighted average (BWAM) includes all outstanding shares in the calculation — the most founder-friendly variant. Narrow-based weighted average includes only preferred shares, making the adjustment more aggressive. Both are more founder-friendly than full ratchet (which resets the conversion price to the new low price regardless of volume).
In Practice
Imagine Blockchain Ventures invested $2M in CryptoFlow at $8M pre-money, receiving 1M preferred shares at $2 per share. Later, CryptoFlow raises a down round at $1.50 per share, issuing 2M new shares. Using narrow-based weighted average, if there were 5M shares outstanding, the weighted average price becomes: (5M × $2 + 2M × $1.50) ÷ 7M = $1.86 per share. Blockchain Ventures' conversion price adjusts from $2.00 to $1.86, giving them additional shares upon conversion to maintain their economic position despite the down round.
What good looks like
Why It Matters
This protection prevents investors from being severely diluted in down rounds while being more founder-friendly than full ratchet provisions. For founders, understanding the math helps in negotiations — weighted average is generally acceptable since it provides reasonable investor protection without completely destroying founder ownership. For investors, it's essential protection that maintains economic incentives even when valuations decline, though the specific formula (broad vs narrow-based) significantly impacts the actual adjustment.
VC Beast Take
Most experienced VCs will push for narrow-based weighted average, which includes fewer shares in the calculation and provides stronger protection. Smart founders negotiate for broad-based, which dilutes the anti-dilution effect. The real trick is in the details — what counts as 'outstanding shares' can dramatically change the math. Don't just accept standard language without modeling different scenarios.
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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?
A term sheet is a non-binding document that outlines the key terms of a proposed investment — valuation, amount, ownership percentage, and governance rights. It's the starting point for negotiating a deal.
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.
Weighted average anti-dilution is the standard form of anti-dilution protection in VC deals. When a company raises a down round, weighted average anti-dilution adjusts the conversion price of existing preferred stock based on: how many shares were sold at the lower price AND what that lower price...
Understanding Weighted Average Anti-Dilution is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Weighted Average 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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