← All terms Anti-dilution protection adjusts the rate at which preferred stock converts
into common when the company later sells shares below the price that
preferred paid. It does not stop dilution from new shares being issued, which
ordinary pro rata arithmetic governs; it specifically compensates price-based
dilution, the loss of value from a cheaper round.
The mechanism is the conversion price. Preferred shares convert to common at
a ratio of original price over conversion price; lowering the conversion
price raises the number of common shares received. Full ratchet resets the
conversion price to the new round’s price, however few shares that round
sold, as if the protected investor had invested at the lower price all along.
Weighted average adjusts proportionally, blending the old price and the new
price by the relative sizes of the existing capitalization and the cheap
issuance; the broad-based variant counts the fully diluted capitalization in
that blend, which softens the adjustment, and is the standard.
Carve-outs matter: option pool grants, conversion of existing instruments and
similar issuances are customarily exempt, so routine operations do not
trigger the clause. Because every extra as-converted share for protected
preferred comes out of common, the founders absorb both the down round and
the adjustment; that double hit is why the form of this clause deserves
negotiation time that founders usually spend elsewhere.
In Canada
Canadian rounds are typically smaller in CAD terms than their US comparables, so a down round after an ambitious seed is a live scenario rather than a tail risk. The CVCA model documents, the starting point for most Canadian priced rounds, use broad-based weighted average as the default, and that is the version to hold. Full ratchet tends to surface when a US fund leads the Series A or B on its own paper, sometimes alongside a request to flip into a Delaware entity: treat both as negotiation points, not defaults. Because SR&ED refunds and NRC IRAP contributions stretch runway without touching the cap table, a Canadian founder often has more room than a US peer to walk away from aggressive anti-dilution terms.
Run the numbers
An investor paid CA$2,000,000 at $2.00 per share, 1,000,000 preferred shares. A down round later prices shares at $1.00. Full ratchet: the conversion price resets to $1.00 and the preferred now converts into 2,000,000 common, doubling that investor's as-converted shares at the founders' expense. Broad-based weighted average: the conversion price moves only part of the way down, in proportion to how large the cheap round is relative to the whole capitalization, landing between $1.00 and $2.00. Put numbers on it: with 10,000,000 shares already outstanding and the down round raising $1,000,000 at $1.00 (1,000,000 new shares), the broad-based formula resets the conversion price to $2.00 × (10,000,000 + 500,000) / (10,000,000 + 1,000,000), about $1.91, barely moved, where full ratchet slammed it to $1.00.
Updated July 9, 2026. Open this term in the app →
