# Anti-dilution: weighted average and full ratchet

> The NVCA's two anti-dilution formulas, run on a hypothetical Northwind down round.

Source: https://lopifi.com/learn/term-sheet-explained/anti-dilution
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**What is anti-dilution protection — broad-based weighted average vs full ratchet?** The NVCA's two anti-dilution formulas, run on a hypothetical Northwind down round.

[Anti-dilution protection](https://lopifi.com/md/glossary/anti-dilution-protection) lowers the preferred's conversion price if the company later sells stock below it — a [down round](https://lopifi.com/md/glossary/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.

> “CP2 = CP1* (A + B) / (A + C).”

— [NVCA Model Certificate of Incorporation (Oct. 2025), §4.4.4 (broad-based weighted average)](https://nvca.org/model-legal-documents/), Broad-based weighted average anti-dilution

> “to the consideration per share received by the Corporation for such issue or deemed issue of the Additional Shares of Common Stock”

— [NVCA Model Certificate of Incorporation (Oct. 2025), §4.4.4 (full ratchet)](https://nvca.org/model-legal-documents/), Full ratchet anti-dilution

**Scenario — A down round.** A down round that never has to happen: Northwind sells 4,000,000 new shares for $2,000,000 — $0.5000 a share, below the Seed's $0.819798. A is 10,978,308: everything after the Seed except the unissued pool.

| Method | New conversion price | Common on conversion |
| --- | --- | --- |
| No adjustment | $0.819798 | 2,439,624 |
| Broad-based weighted average | $0.7344 | 2,723,310 |
| Full ratchet | $0.5000 | 3,999,997 |

The Seed investors' 2,439,624 preferred shares, converting at original issue price ÷ conversion 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**
- Pro: Adjusts in proportion to how much stock is sold below the price
- Pro: Counts options outstanding in A, which softens it
- Con: Still shifts some of a down round's dilution to common
- Best for: The market standard for venture preferred

**Full ratchet**
- Pro: Maximum protection for the investor
- Con: One tiny issue below the price reprices the whole series
- Con: Makes a down round much harder to raise
- Best for: Almost never the founder's choice

## Where this page's rules come from

- [NVCA Model Certificate of Incorporation (Oct. 2025), §4.4.4 (broad-based weighted average)](https://nvca.org/model-legal-documents/) — Broad-based weighted average anti-dilution (reference)
- [NVCA Model Certificate of Incorporation (Oct. 2025), §4.4.4 (full ratchet)](https://nvca.org/model-legal-documents/) — Full ratchet anti-dilution (reference)

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- **Terms taught:** [Anti-dilution protection](https://lopifi.com/md/glossary/anti-dilution-protection), [Down round](https://lopifi.com/md/glossary/down-round), [Preferred stock](https://lopifi.com/md/glossary/preferred-stock)
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