Anti-Dilution

Anti-dilution is a protective mechanism for preferred investors, triggered when a company raises at a lower price per share than prior rounds. The two most common forms are weighted average (more common, less punitive) and full ratchet (rare, highly punitive). In practice, anti-dilution affects dilution allocation, future investor appetite, and employee morale.

From an allocator perspective, anti-dilution is not just a legal clause. It is a stress-regime behavior signal:

• How does the GP act when the market reprices?
• Do they protect economics in ways that preserve long-term company health?
• Or do they impose structures that make the next round impossible?

How allocators define anti-dilution risk drivers

They assess:

• Mechanism: broad-based weighted average vs narrow-based vs full ratchet
• Severity: how punitive the adjustment is to founders/employees
• Interaction with pay-to-play: incentives for insiders to support
• Down-round frequency: portfolio vulnerability to repricing
• Future financing impact: whether cap table becomes unattractive
• Governance: board decisions and restructuring approach

Allocator framing:
“Does protection preserve long-term value—or destroy financability?”

When anti-dilution matters most

• prolonged down markets with repeated repricing
• companies needing bridge rounds or insider-led rescues
• situations with multiple preference layers already in place

How allocators evaluate VC managers

Conviction increases when:

• the manager favors sustainable structures over punitive ones
• down rounds are managed with cap table health in mind
• the GP is transparent on repricing and mark policy
• there is a consistent framework for bridges vs repricing
• the manager has evidence of financing through stress cycles

What slows allocator decision-making

• portfolio companies with messy cap tables and punitive provisions
• GPs that treat anti-dilution as default leverage rather than last resort
• lack of disclosure on structure terms in down rounds
• reluctance to explain how dilution was allocated historically

Common misconceptions

• “Anti-dilution guarantees returns” → it can still fail if exits are weak.
• “Weighted average is harmless” → it can still materially dilute teams.
• “Full ratchet is smart protection” → it can kill the next round.

Key allocator questions

• What anti-dilution terms do you accept by stage?
• How do you balance investor protection with company financability?
• How often did anti-dilution trigger in your history?
• How do you handle insider-led rescues?
• What is your policy for transparent repricing and marking?