Reference · Rights & restrictions
Anti-dilution protection
Provisions that adjust preferred shareholders' conversion terms if the company later raises at a lower price ("down round").
Worked example
A worked example of a broad-based weighted-average ratchet (illustrative figures):
- 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.
- 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.
- 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.
- 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.
Where this trips people up
Anti-dilution is often assumed to protect all shareholders. It protects the investors who negotiated it, and it does so at the expense of everyone who did not — typically common holders and employees. In a down round, that reallocation happens automatically and can be larger than the headline valuation drop suggests.
Frequently asked
Who pays for anti-dilution protection?
Common shareholders, in effect. Adjusting protected investors' conversion terms increases their share count, which dilutes everybody without the protection.
Does anti-dilution matter in a secondary sale?
Yes. A buyer of common stock is buying a position whose future share of the company can shrink if a down round triggers protections above it. That risk belongs in the price.
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