Anti-dilution protection

Worked example

A worked example of a broad-based weighted-average ratchet (illustrative figures):

1. An investor bought Series B preferred at $10/share. A later down round, Series C, prices new shares at $4/share — well below the Series B price.
2. Under a typical broad-based weighted-average anti-dilution formula, the Series B conversion price adjusts downward — to roughly $7.50/share in a representative scenario — meaning each Series B share now converts into more common shares than it originally would have.
3. That adjustment comes at the expense of common shareholders (including founders, employees, and anyone who bought common stock via a secondary transaction): the same number of Series B shares now convert into a larger slice of the company, diluting everyone else's percentage ownership.
4. A secondary buyer purchasing common stock needs to check whether the company has any preferred series carrying anti-dilution protection — a future down round can quietly reduce a common holder's ownership percentage even if the buyer's own share count never changes.