Anti-dilution
Protection that adjusts an investor's effective share price if the company later raises at a lower valuation.
Why it matters
It shifts the pain of a down round onto founders and employees. The formula matters enormously, and the difference between the two common versions is severe.
A worked example
Broad-based weighted average adjusts the price partially, in proportion to the size of the new round. A full ratchet reprices all earlier shares to the new lower price, regardless of how small the new round is.
What is typical
Broad-based weighted average is standard and generally acceptable. A full ratchet is aggressive and should be resisted.
Related terms
Preferred stock
The share class investors buy, carrying rights that common stock does not have.
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