Anti-Dilution: Protecting Investors or Punishing Founders?

Anti-dilution protection shields investors from the impact of a "down round" — when a company issues new shares at a price lower than what investors paid previously. It ensures investors maintain their economic value by adjusting their conversion price.

Common Variations

Full Ratchet — The most aggressive form. If new shares are issued at a lower price, the investor's conversion price is reset to that lowest price regardless of how many shares are issued. Founders can be massively diluted. This is rare in modern deals — resist it.

Broad-Based Weighted Average — The market standard. Adjusts the conversion price using a weighted average that includes all outstanding shares (common, preferred, options, warrants). The dilutive impact is shared more equitably. Most founder-friendly.

Narrow-Based Weighted Average — Only considers outstanding preferred shares, excluding options and warrants. Results in greater adjustment and more founder dilution than broad-based. Less common.

Evolv's Recommendations

• Avoid full ratchet — it is highly unfavourable to founders and almost never justified in early-stage deals.
• Push for broad-based weighted average — the fair, market-standard approach.
• Negotiate carve-outs: ESOP issuances, acquisition-related shares, and previously outstanding convertible instruments should not trigger anti-dilution.
• Understand the formula: The precise definition of "shares outstanding" in the weighted average calculation significantly affects the outcome.
• Be aware that aggressive anti-dilution terms can deter future investors in subsequent rounds.

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