Price protection refers to anti-dilution provisions in preferred stock that adjust investor economics when the company issues shares at a lower price than a prior round.

How it works

Common forms: broad-based weighted average (standard, moderate founder impact) and full ratchet (rare, severe—reprices earlier investors to the new low price). Triggered by qualified down rounds excluding certain employee grants or strategic issuances per charter language.

When triggered, preferred holders receive additional shares or lower conversion prices, increasing their ownership without new cash. Founders and common holders absorb most dilution unless recap terms negotiate otherwise.

Why it matters

• Founders: Negotiate broad-based weighted average and carve-outs; understand cumulative effect across multiple protected rounds.
• Investors: Price protection preserves ownership through setbacks—critical for funds with ownership targets and follow-on reserves.

Common mistake

Assuming anti-dilution never triggers because “we will never do a down round”—market shocks make protection clauses real, not theoretical.

Related ideas

See preferred stock, down round, and pay-to-play.