VC & PE Glossary
What Is Anti-Dilution?
Updated
Definition
Anti-dilution protection adjusts an investor's conversion price if the company issues shares later at a lower price—protecting early preferred holders from down-round dilution beyond normal ownership math.
Useful for: Founders, Investors
Anti-dilution is a preferred-stock provision that retroactively lowers an investor’s effective purchase price when the company raises a qualifying down round, issuing them additional shares.
How it works
Two common flavors: broad-based weighted average (standard, milder adjustment using a formula with old and new prices and shares outstanding) and full ratchet (harsh—reprices to the new low price as if the investor originally paid that). The charter specifies which financings trigger adjustment and carve-outs for employee options, strategic warrants, or conversions.
On a down round, lawyers model the cap table before and after anti-dilution to show founder and employee dilution. Some rounds negotiate waivers in exchange for other concessions.
Why it matters
- Founders: Push for broad-based weighted average; avoid full ratchet unless crisis financing leaves no choice.
- Investors: Anti-dilution protects entry price; waiving it is a bargaining chip in recapitalizations.
- Operators: Option pool refresh after anti-dilution events may be needed to retain talent.
Common mistake
Assuming anti-dilution only matters in bankruptcy scenarios. A moderate down round with full ratchet can transfer massive ownership from common to preferred.
Related ideas
1x liquidation preference, down round, pay-to-play, and recapitalization.
Related terms
- 1x Liquidation Preference — 1x liquidation preference means preferred shareholders get back an amount equal to their original investment before common shareholders receive anything in a exit or liquidation event.
Common questions
Short answers for founders, LPs, and operators