Anti-Dilution Rights Explained

Anti-dilution rights protect a preferred shareholder's effective price per share if the company later raises capital at a lower valuation (a down round), typically by adjusting their conversion ratio to common stock so their effective ownership is preserved relative to the new, lower price.

The two common mechanisms are full-ratchet (the investor's conversion price resets entirely to the new, lower round price — very protective for them, very dilutive to everyone else) and weighted-average (a formula that partially adjusts based on the size of the new round — more moderate and more common in practice).

The common failure is an investor without anti-dilution protection not realizing how disproportionately they will be diluted in a future down round relative to a senior investor who does hold full-ratchet protection — the senior investor's protection is funded by additional dilution to everyone without it.

Before committing, confirm whether the specific security class being offered carries anti-dilution protection, and if senior investors in the cap table hold full-ratchet protection, model how a future down round would disproportionately dilute unprotected holders including this specific position.

Anti-dilution protection held by senior investors is effectively funded by additional dilution to those without it — always check where your own position sits in this hierarchy.