---
title: "Anti-Dilution Protection: Weighted Average vs Full Ratchet, Explained"
description: "Anti-dilution protection adjusts an investor's conversion price if the company raises at a lower valuation. Here's the math behind broad-based, narrow-based, and full ratchet."
date: 2026-04-18T00:00:00.000Z
tags: ["vc-explainers", "deal-terms", "startup-funding", "investor-education"]
source: https://venturecapitaltracker.com/anti-dilution-protection-weighted-average-full-ratchet
---

# Anti-Dilution Protection: Weighted Average vs Full Ratchet, Explained

> Anti-dilution protection adjusts an investor's conversion price if the company raises at a lower valuation. Here's the math behind broad-based, narrow-based, and full ratchet.

**Anti-dilution protection** adjusts the **conversion price** of preferred stock if the company later issues shares at a lower price (a "down round"). It exists to protect early investors from being mathematically penalized when later investors buy shares at a cheaper price.

### The three common flavors

#### 1. Broad-based weighted average (market standard)

Adjusts the conversion price using a formula weighted by **all existing shares** (common, preferred, options) plus new shares in the down round.

**Formula**:
`New conversion price = Old price × (A + B) / (A + C)`

Where:
- A = Total shares outstanding (fully diluted) before the down round.
- B = Shares that would be issued at the old price for the down round amount.
- C = Shares actually issued in the down round.

This is **founder-friendly-ish** because it spreads dilution.

#### 2. Narrow-based weighted average

Same formula, but A includes only the **preferred shares** (not common + options). More protective of investors, more dilutive of founders.

#### 3. Full ratchet

Adjusts the conversion price **all the way down** to the new round's price — regardless of the amount raised. Ultra-investor-friendly, founder-punitive.

### Worked example

Setup:
- Series A: $10M invested at $1.00/share → 10M preferred shares.
- Pre-round outstanding (fully diluted): 20M shares.
- 9 months later, the company raises a **down round at $0.50/share** — $2M raised, issuing 4M new preferred shares.

**Full ratchet**:
- Series A conversion price drops to $0.50. Series A investors now effectively hold 20M shares — doubling their ownership at the expense of common.

**Broad-based weighted average**:
- New price = $1.00 × (20M + $2M/$1.00) / (20M + 4M) = $1.00 × (20M + 2M) / 24M ≈ $0.917.
- Series A's effective share count increases by ~9%, not 100%.

**Difference in dilution to founders**: Full ratchet creates ~10M extra preferred shares to investors. Broad-based weighted creates ~900K. That's a 10x difference in founder dilution.

### Pay-to-play provisions

A **pay-to-play** clause says: anti-dilution protection is available only if the investor **participates pro-rata in the down round**.

- Protects the company's ability to raise follow-on capital.
- Penalizes investors who refuse to support the company.
- Common in distressed rounds.

### What to negotiate

1. **Broad-based weighted average** (never accept full ratchet unless you have no alternative).
2. **Pay-to-play** — helps future rounds close cleanly.
3. **Exceptions to anti-dilution** — should exclude option pool grants, M&A-related shares, and similar non-financing issuances.

### Practical takeaway

1. **Founders**: Broad-based weighted average is standard and should be non-negotiable as the floor.
2. **Investors**: Understand that full ratchet in a term sheet is a visible founder-hostility signal and can damage deal flow.
3. **Operators**: If a down round is likely, negotiate pay-to-play upfront to avoid future pain.

### Further reading

- NVCA model documents: https://nvca.org/model-legal-documents/

**By:** [Venture Capital Tracker](https://venturecapitaltracker.com/editorial-policy)

**Editorial note:** AI tools assisted with research, structure, or drafting. Venture Capital Tracker retains human editorial responsibility for factual accuracy, relevance, and source quality before publication.