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.