Dilution
What is Anti-dilution Protection?
A clause that adjusts a preferred shareholder's conversion price downward if the company later sells stock at a lower price.
Anti-dilution protection adjusts the conversion ratio of preferred stock on down rounds. Two main forms: weighted-average (the standard, mildly adjusts based on round size and price) and full-ratchet (the punitive form, adjusts to match the new lower price exactly). Full-ratchet is rare today outside of distressed situations. Anti-dilution protects investors from being heavily diluted if the company has to raise at a lower valuation later - but at the expense of founders and common shareholders.