The short answer
Anti-dilution provisions protect preferred investors if a company later sells shares at a lower price than they paid (a down round). Their conversion price is adjusted downward, so their preferred shares convert into more common shares. The two main forms are weighted average and full ratchet.
- Anti-dilution kicks in on a down round, not on normal dilution.
- Broad-based weighted average is the more founder-friendly common form.
- Full ratchet resets the investor's price to the new lower price.
- The extra shares come out of everyone else's ownership.
How it works
Preferred stock converts into common at a conversion price, usually starting at the price the investor paid. If you later issue shares for less, the clause lowers that conversion price. Full ratchet drops it all the way to the new price. Weighted average lowers it by a formula that considers how many cheaper shares were sold; the "broad-based" version counts more shares in the formula and so adjusts less.
Worked example (hypothetical)
Seed investors pay $1.00 per share for 2,000,000 preferred shares. A year later you raise at $0.50. Under full ratchet, their conversion price becomes $0.50, so they now convert into 4,000,000 common shares. Under broad-based weighted average, if 7,000,000 shares were outstanding on a fully diluted basis and you sell 3,000,000 new shares at $0.50 ($1.5M), the new price is $1.00 × (7,000,000 + 1,500,000) ÷ (7,000,000 + 3,000,000) = $0.85, so they'd convert into about 2,350,000 shares. The difference comes out of founders' and employees' ownership.
Why it matters to a pre-seed or seed founder
Most early rounds go up, so this clause can feel theoretical. But if a round goes down, the formula decides how much of the cost lands on you. Ask for broad-based weighted average and avoid full ratchet. Read it alongside down round, dilution and liquidation preference.
Frequently asked questions
Does anti-dilution protect against every new share issue?
No. It applies when shares are sold below the investor's price, and standard carve-outs exclude things like option-pool grants.
Do SAFEs have anti-dilution clauses?
Standard SAFEs don't. Anti-dilution comes with the preferred stock in a priced round.
Which form is most founder-friendly?
Broad-based weighted average adjusts the least; full ratchet adjusts the most.