---
title: "Anti-Dilution Protection"
url: "https://mahouse.world/glossary/anti-dilution-protection"
type: "glossary term"
topic: "Venture funding"
author: "Ihor Vlasov"
reviewed: "2026-09-20"
published: "2026-08-10"
---

# Anti-Dilution Protection

Anti-dilution protection is a term of preferred shares that adjusts the investor's conversion price downward if the company later sells shares at a lower price, so that the investor ends up with more common shares than it originally paid for and its stake is protected against the down round. A full ratchet resets the price to the new round's; a weighted-average ratchet — the usual form — adjusts it in proportion to how much was raised at the lower price.

**Also known as:** Anti-dilution, Ratchet, Weighted-average anti-dilution, Full ratchet

## Key facts

- **Used at:** every venture and growth term sheet; triggered by a down round, a discounted issue, or sometimes an IPO below the round price (an "IPO ratchet")
- **Binding:** yes — in the articles or charter as a feature of the preferred class; it operates automatically when a dilutive issue occurs
- **Typical forms:** broad-based weighted average (standard — adjusts the conversion price by a formula weighted by all shares outstanding), narrow-based weighted average (weighted by fewer shares, more investor-friendly), and full ratchet (the conversion price becomes the new price, however few shares were sold)
- **Typical carve-outs:** option grants under an approved pool, conversion of existing instruments, shares issued in acquisitions or to lenders — issues that are not "dilutive" for this purpose
- **Parties:** the protected investors, the founders and employees whose ordinary shares absorb the adjustment, and the new investors in the down round, who must price it knowing the ratchet will fire

## How anti-dilution protection works in practice

A fund buys preferred shares at €5.00, convertible one-for-one into ordinary shares. The company later raises at €2.50. Without protection, the fund's shares are now worth half what it paid and its percentage falls like everyone's. With a full ratchet, its conversion price becomes €2.50: each preferred share now converts into two ordinary shares, its percentage roughly doubles, and the founders' and employees' shares are diluted twice — once by the new money, once by the ratchet. With a broad-based weighted average, the conversion price falls to a figure between €5.00 and €2.50, weighted by how many shares were sold at the low price relative to the company's total: a small down round moves it a little, a large one more.

The protection shifts the cost of a down round from the protected investors to the ordinary shareholders — which means founders and staff, who can be left with very little of a company that is still operating. It also complicates the down round itself: a new investor pricing at €2.50 must model the ratchet's dilution to know what its money buys, and often insists that earlier investors waive their protection as a condition of the round. In the fintech down rounds of 2022–2023, that waiver negotiation was where most of the time went.

Founders accept weighted-average protection as standard and refuse full ratchets; they also negotiate a "pay-to-play" — an investor keeps its protection only if it invests its pro rata in the down round.

## Example

A fintech's Series B investor paid €20m at €5.00 a share for 4m preferred shares — 20% of a 20m-share company. A year later the company raises €10m at €2.50 (4m new shares). Under a broad-based weighted average, the conversion price adjusts to €5.00 × (20m + 2m) ÷ (20m + 4m) = €4.58: the B's 4m preferred now convert into 4.36m ordinary — 17.9% of the enlarged 24.4m-share company instead of the 16.7% it would have held with no protection. Under a full ratchet, the price becomes €2.50, the B converts into 8m ordinary, and it holds 28.6% of a 28m-share company — while the founders' 8m shares fall from 40% to 28.6%. The new investor, seeing the full ratchet, had made its €10m conditional on the B waiving it; the B agreed to weighted average in exchange for a board seat.

## Common mistakes

- Accepting a full ratchet because the round is "never going to be a down round".
- A weighted-average formula with a narrow base, which is a ratchet in disguise.
- No carve-outs, so option grants and acquisition shares trigger the adjustment.
- New investors pricing a down round without modelling the ratchets that fire on it.
- Founders learning what the term does at the round that triggers it.

## Related terms

- [Down Round](https://mahouse.world/glossary/down-round.md)
- [Liquidation Preference](https://mahouse.world/glossary/liquidation-preference.md)
- [Series D](https://mahouse.world/glossary/series-d.md)
- [Cap Table](https://mahouse.world/glossary/cap-table.md)
- [Pre-Money Valuation](https://mahouse.world/glossary/pre-money-valuation.md)
- [Term Sheet](https://mahouse.world/glossary/term-sheet.md)

— Ihor Vlasov, M&A FinTech Expert. Last reviewed 2026-09-20. https://mahouse.world/authors/ihor-vlasov