What is broad-based weighted average anti-dilution?

Full Explanation

Broad-based weighted average reprices investor shares downward if a future round prices lower, but only proportionally — less punitive than full ratchet, now market standard. The weighted average formula is: new price = old price × (pre-money + money raised) / (pre-money + money raised at new round). In practice, if Series A bought at £2 and Series B prices at £1, the Series A gets repriced to roughly £1.50 (depending on the size of the Series B raise). This is significantly less harsh than full ratchet but still dilutes founders more than narrow-based weighted average, which excludes the dilutive effect of non-convertible debt and options. Broad-based weighted average is now standard market in institutional VC. The logic: Series A investors deserve some protection against dilution (they took risk early), but the penalty shouldn't be so severe that founders lose all incentive to continue building. For founders, broad-based weighted average is acceptable — it's the floor for investor protection in Series A and later rounds. Narrow-based (which only counts equity rounds, not optionality) is more founder-friendly but rare in institutional fundraising. The interplay between different shareholder rights creates complex payout scenarios that founders should model before signing any term sheet. Pro-rata rights, tag-along and drag-along provisions, and conversion mechanics all interact in ways that can produce counterintuitive results. For example, a higher valuation round with participating preferred shares and a ratchet anti-dilution provision can leave founders worse off than a lower valuation with standard non-participating preferred terms. Modelling the payout waterfall across multiple exit scenarios is essential due diligence.

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