Down-round protection is the bundle of legal rights that reduce how much preferred investors dilute when a company raises at a lower price than their original investment.

How it works

The main tool is anti-dilution in the certificate of incorporation. Two common flavors:

Weighted average anti-dilution adjusts the conversion price based on how much money was raised down and how far the price dropped. It is the market standard in most U.S. venture deals.

Full ratchet resets the earlier investor’s price to the new lower price as if they had invested at the down round—much harsher on founders and common.

Example: an investor bought Series A at $1.00 per share with broad-based weighted average protection. A Series B down round at $0.60 triggers a conversion price adjustment. The Series A holder receives additional shares on conversion without paying new money—ownership shifts away from common.

Other protections include ratchets tied to milestones, liquidation preference multiples that step up on down rounds, and pay-to-play that suspends protection for non-participating investors.

Why it matters

• Founders: Down-round protection can silently transfer 5–15+ points of ownership in bad scenarios. Model cap tables with down-round cases before signing.
• Investors: Protection aligns incentives—earlier backers took risk and want guardrails. New investors may resist excessive ratchets that block clean financings.
• Employees: Common and option pools bear most anti-dilution pain. Repricing may be needed to retain talent after a reset.

Common mistake

Assuming “standard” anti-dilution is harmless. Weighted average is normal, but narrow-based formulas and full ratchets still hurt. Read the exact formula in the charter, not the term sheet summary.

Related ideas

• Down Round — the event that triggers protection
• Weighted average vs full ratchet — severity of adjustment
• Pay-to-play — trade protection for participation
• Conversion price — the number anti-dilution adjusts