Anti-dilution: weighted average and full ratchet
The NVCA's two anti-dilution formulas, run on a hypothetical Northwind down round.
Anti-dilution protection lowers the preferred's conversion price if the company later sells stock below it — a down round. The NVCA model gives two versions. Broad-based weighted average: CP2 = CP1 × (A + B) ÷ (A + C), where A is the common outstanding before the issue (options outstanding and preferred as converted counted in), B the shares the new money would have bought at CP1, and C the shares actually issued. Full ratchet: CP2 drops to the new price.
Wrong
Full ratchet: 1,560,373 more — as if they had bought at the down round's price.
Right
Broad-based: 283,686 more common shares for the Seed investors.
Every extra share the preferred converts into comes out of the founders' and employees' percentage.
Broad-based weighted average
- Good at
- Adjusts in proportion to how much stock is sold below the price
- Counts options outstanding in A, which softens it
- Watch for
Still shifts some of a down round's dilution to common
- Best for
- The market standard for venture preferred
Full ratchet
- Good at
Maximum protection for the investor
- Watch for
- One tiny issue below the price reprices the whole series
- Makes a down round much harder to raise
- Best for
- Almost never the founder's choice
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- Background reading — not an authority
- NVCA Model Certificate of Incorporation (Oct. 2025), §4.4.4 (broad-based weighted average) (opens in a new tab)Broad-based weighted average anti-dilutionFree to read
- NVCA Model Certificate of Incorporation (Oct. 2025), §4.4.4 (full ratchet) (opens in a new tab)Full ratchet anti-dilutionFree to read
The words this page teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Anti-dilution protectionA charter provision that lowers preferred stock's conversion price when the company later sells stock below it. Broad-based weighted average moves it part way, by CP2 = CP1 × (A + B) ÷ (A + C); full ratchet moves it all the way down to the new price
- Down roundA priced round at a lower price per share than the last one — the event anti-dilution provisions are written forConvention
- Preferred stockA class or series of stock with rights common lacks, set out in the charter — usually a liquidation preference, conversion into common, anti-dilution protection, protective provisions and board seats. What investors buy in a priced round, and what a SAFE converts into