What is broad-based weighted average anti-dilution?
Short Answer
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.
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.
Related Glossary Terms
Related Questions
Vesting is the gradual earning of equity over time (typically 4 years). A cliff is a waiting period (usually 1 year) before any equity vests — protect...
Pre-money valuation is the implied value of a company before new investment. It determines how much equity an investor receives for their cheque.
Pay-to-play means existing investors must participate in future rounds (pro-rata rights) or lose their anti-dilution protection, ensuring committed lo...
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.