Anti-dilution, modeled
Compare broad-based weighted average and full ratchet anti-dilution outcomes when a down round triggers protection.
Anti-dilution protection is one of the venture financing terms that founders sign without modeling, and that becomes consequential the day a down round arrives. The mechanics are not complicated, but the outcomes between broad-based weighted average and full ratchet are large enough that getting the model in front of founders before signing is the difference between an informed decision and a future grievance.
The anti-dilution calculator takes the inputs (original price per share, original investment, common shares outstanding, options outstanding, new round price, new round investment) and produces the adjusted conversion price under both broad-based weighted average and full ratchet. The output is the per-share difference, the additional shares each protection mechanism produces for the investor, and the resulting dilution to founders.
When to model this
When you are negotiating a Series A or B term sheet and the investor has proposed anti-dilution language. The default is broad-based weighted average and most founders should not concede beyond that. If the investor pushes for full ratchet, run the model on a hypothetical down round and show what the founder dilution looks like. The conversation usually shifts.
When you are advising founders on whether the protective provisions in an existing term sheet are reasonable. If a Series Seed had full ratchet (this happens), the model shows what that means at the Series A.
When you are pitching a board on raising at a flat or slightly down round. Anti-dilution triggers cascade. Modeling the resulting cap table before the board vote prevents the surprised reaction in the meeting.
The doctrine briefly
Broad-based weighted average is the market standard. It adjusts the conversion price based on the size of the new round relative to the company’s capitalization. It produces meaningful but bounded protection.
Full ratchet adjusts the conversion price to the new round price regardless of round size. It is investor-friendly in a way that becomes dramatic in small down rounds. A $100K bridge at a 50 percent lower valuation can produce significant common dilution under full ratchet that broad-based weighted average would not.
The calculator surfaces the difference in concrete share counts and percentages. The conversation it enables is the one founders should have before signing, not after the down round triggers.
Walter Allison is a corporate attorney in Denver. He writes here about M&A, private equity, and venture capital structure.
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