A protection that adjusts an investor's ownership if the company raises money at a lower valuation (a down round). Weighted average anti-dilution is founder-friendly; full ratchet is investor-friendly.
Why it matters
Anti-dilution provisions protect investors when things go wrong, but they can significantly reduce founder ownership in a down round. Understanding the difference between full ratchet and weighted average is critical during fundraising negotiations. The type of anti-dilution you agree to today determines how much pain you feel if you ever raise at a lower valuation.
How it works
In a down round (raising at a lower valuation than the previous round), anti-dilution adjusts the investor's conversion price so they get more shares per dollar invested. Weighted average anti-dilution is the standard. It adjusts based on how much money was raised at the lower price relative to the total capitalization. Full ratchet is more aggressive and resets the conversion price entirely to the new lower price regardless of how much was raised. For example, if an investor bought in at $10/share and you do a down round at $5/share, full ratchet reprices all their shares to $5, effectively doubling their share count.
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