VC & PE Glossary
What Is Weighted Average Anti-Dilution?
Updated
Definition
Weighted average anti-dilution adjusts the conversion price of preferred stock in a down round based on how much new money came in and at what price — a middle ground between full ratchet and no protection.
Useful for: Founders, Investors
Weighted average anti-dilution is the standard down-round protection that recalculates preferred conversion price using how much new capital enters and at what valuation — softer than a full ratchet reset.
How it works
When new shares issue below prior conversion price, anti-dilution triggers. Weighted average formulas include:
- Broad-based: counts all common outstanding (fully diluted, including options) in denominator — founder-friendlier
- Narrow-based: excludes some common equivalents — harsher on founders
Classic broad-based formula conceptually:
New conversion price = old conversion price × ((common outstanding + money at old price / old price) ÷ (common outstanding + new shares issued))
Example sketch: Series A at $1.00 conversion; down round at $0.50 with substantial new money. Weighted average might reset conversion to ~$0.85 instead of $0.50 under full ratchet — prior investors gain extra shares on conversion, founders dilute moderately.
Anti-dilution applies on conversion at exit or IPO, not always immediately as new shares — but cap table models must include it before signing down rounds.
Why it matters
- Founders: Negotiate broad-based weighted average in term sheets; avoid full ratchet unless crisis financing. Model pro forma ownership after trigger.
- Investors: Protects prior fund marks and ownership in down rounds without destroying founder incentives as aggressively as ratchet.
Common mistake
Assuming anti-dilution never triggers on flat rounds with heavy structured preferences. Read the definition of “down round” in your charter — some terms trigger on any new preferences with better economics.
Related ideas
See also full ratchet, liquidation preference, and pay-to-play.
Related terms
- Liquidation Preference — Liquidation preference is the right of preferred shareholders to receive a specified amount — often 1x their investment — before common shareholders receive proceeds in a sale, merger, or winding-up.
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Common questions
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