Anti-Dilution
A protection clause that adjusts an investor's share price downward if the company raises at a lower valuation.
Definition
Anti-dilution provisions protect investors from losing value if a company raises a subsequent round at a lower valuation (a "down round"). There are two types: full ratchet (the investor's conversion price drops to the new round's price, regardless of how much is raised) and weighted average (adjusts based on how much new money is raised relative to existing shares). Weighted average is more common and founder-friendly.
Broad-based weighted average anti-dilution is the market standard. Full ratchet is aggressive and should be resisted unless you have no leverage.
Why it matters for founders
Anti-dilution can dramatically increase investor ownership in a down round, significantly diluting founders and employees. Understanding the difference between full ratchet and weighted average can save you millions in equity value.
Example
An investor buys shares at $10/share with full ratchet anti-dilution. A down round prices shares at $5. Full ratchet adjusts the investor's price to $5, doubling their shares. With weighted average, the adjustment would be much smaller - perhaps to $8/share depending on the round size.
How Foundra helps
Foundra helps founders build strong traction to avoid down rounds entirely. The best anti-dilution strategy is never needing it by maintaining strong growth and reasonable valuations.
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Related terms
Down Round
A funding round where the company's valuation is lower than the previous round.
Equity Dilution
The reduction in a founder's ownership percentage when new shares are issued to investors.
Term Sheet
A non-binding document outlining the key terms of a proposed investment deal.
Liquidation Preference
An investor's right to get their money back before other shareholders in an exit event.