What is an Anti-Dilution Agreement?
An anti-dilution agreement protects an investor ownership by repricing their shares if the company later sells stock at a lower price.
How does an anti-dilution agreement work?
It lives in the preferred stock terms. If a down round happens, the investor conversion price drops, so their preferred shares convert into more common shares. Two versions dominate. Broad-based weighted average, the market standard, adjusts the price partially and scales to how large and how cheap the new round was. Full ratchet, the harsh version, resets the earlier price all the way down to the new one no matter how small the new round is. Founders and the option pool absorb the difference either way.
Why does an anti-dilution agreement matter?
It decides who pays for a bad year. Under weighted average, a down round hurts everyone a little. Under full ratchet, it can hand a large slice of the company to one earlier investor and gut the founding team incentive at exactly the moment you need them. You negotiate this clause once and live with it for the life of the company.
Where did anti-dilution come from?
The provisions come from decades of US venture financing practice and are now standard boilerplate. The National Venture Capital Association model legal documents codified the common forms and made weighted average the default most parties start from.
How do you negotiate anti-dilution well?
Push for broad-based weighted average and treat full ratchet as a red flag unless the company is genuinely in distress. If you must take a ratchet, cap it: limit it by time, by amount raised, or with a sunset at the next qualified round. Model the outcome at a real down-round price before you sign, not after. And read it beside your pay-to-play terms, because a clause that only protects investors who keep funding is a very different deal.
Bottom line: Anti-dilution decides who eats the loss when the next round prices lower, and full ratchet means it is you.
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