What is anti-dilution protection?
Short Answer
Anti-dilution clauses protect investors if a later funding round occurs at a lower valuation (a down round), entitling them to additional shares at no extra cost.
Full Explanation
Anti-dilution clauses protect investors if a later funding round occurs at a lower valuation (a down round), entitling them to additional shares at no extra cost.
Imagine an investor buys Series A preferred stock at a £5M pre-money valuation, receiving 10% equity for a £500K investment. A year later, market conditions worsen and the Series B round occurs at only £3M pre-money. Without anti-dilution protection, the Series A investor's stake is now worth less in market terms. Anti-dilution clauses address this by adjusting the investor's share price (and thus equity percentage) downward to match the lower round. Full ratchet anti-dilution is the most founder-unfriendly: the Series A investor's price simply drops to the Series B price, even if only a small part of the new round was at that lower price. Broad-based weighted average is more balanced: the adjustment is weighted by the amount raised at each price, softening the dilution. Narrow-based weighted average (common in VC deals) uses only preferred stock in the calculation. Down round anti-dilution can significantly increase dilution for founders and employees. Founders should negotiate limited anti-dilution provisions (often carve-outs for employee options or price adjustments within defined thresholds).
Related Glossary Terms
Related Questions
A recap allows founders and early investors to sell a portion of their shares to new investors without an exit, providing partial liquidity before the...
Tag-along rights allow minority shareholders (founders) to participate in a transaction on the same terms as majority shareholders, preventing founder...
A SPAC (special purpose acquisition company) is a blank-cheque company that merges with a private company to take it public, avoiding IPO roadshow but...
Further Reading
What is a down round and how does it affect founders?
A down round is a funding event where the company's valuation is lower than the previous round, signalling market concerns and potentially triggering anti-dilution consequences for founders.
Read more →Want to see these concepts in action?
Take the free intangible asset assessment to see how these concepts apply to your business.