Anti-Dilution Protection: Full Ratchet vs. Weighted Average, Explained

What is anti-dilution protection?

Anti-dilution protection is a term sheet clause that automatically reprices an earlier investor's shares when a startup later raises money at a lower valuation than that investor paid. It exists to solve one specific problem: a down round tells everyone, in writing, that the company is worth less than it was — and without this clause, an investor who bought in at the higher price would be stuck holding the same percentage of a company both sides now agree is worth less.

The clause converts that paper loss into extra shares for the protected investor, funded by dilution of everyone else on the cap table — mostly founders, employees, and any investors without the same protection. Nearly every priced round from Seed up includes some version of it; the real fight in a term sheet negotiation is over which version you're signing.

These mechanics come from U.S., Delaware-style venture financing practice. Turkish corporate law has no directly equivalent statutory provision, so a startup raising on a Turkish cap table implements the same protection purely as a contractual term in the shareholders' agreement, not as a right the law grants automatically.

Full ratchet: the harshest version, with an example

Full ratchet is the simplest formula and the most brutal one for founders: it reprices every share the protected investor already owns as if they had originally paid the new, lower price — no matter how small the new round is or how few shares it actually sells.

Say a Series A investor bought in at $2.00 a share. Eighteen months later the company raises a down round — even a small bridge — at $0.50 a share. Under full ratchet, that investor's conversion price resets to $0.50 across their entire stake, effectively quadrupling the common shares they're entitled to on conversion. The tiny new round did the repricing; the size of the check barely mattered.

Weighted average: the founder-friendlier default

Weighted-average anti-dilution is the market standard today precisely because it fixes full ratchet's biggest flaw: it accounts for how much new money actually came in, not just the new price. The formula blends the old conversion price with the new one, weighted by how many shares the round issues relative to shares already outstanding — a small down round barely moves the price; a large one moves it more.

Take the same $2.00 investor, on a broad-based formula. If the $0.50 down round issues new shares equal to 10% of the fully-diluted shares already outstanding, weighted average resets the conversion price to roughly $1.86 instead of full ratchet's $0.50 — a fraction of the dilution, because the formula weighs the round's actual size instead of just its price.

Broad-based vs. narrow-based: the fine print inside weighted average

Weighted average itself splits into two versions founders should read closely. Broad-based counts the full fully-diluted share count — common, preferred, the option pool, and anything reserved for future grants — in the formula's denominator. Narrow-based counts only outstanding preferred (sometimes preferred plus common), leaving the option pool out entirely.

The bigger the denominator, the smaller the adjustment — so broad-based is meaningfully gentler on founders and is the version worth negotiating for. Narrow-based can produce a repricing close to full ratchet's severity even though it's labeled 'weighted average,' which is exactly the kind of term sheet detail that reads harmless until it's modeled against real numbers.

When anti-dilution actually gets triggered

Anti-dilution clauses sit dormant in nearly every cap table and only activate when a startup prices a round below its last round's valuation — a down round. That happens more often than founders expect: a missed growth target that spooks new investors, a funding market that resets valuations across the board (2022–2023 saw a wave of exactly this), or a bridge priced cheap because it's the only capital on the table.

It can also trigger when a convertible instrument converts at a lower price than an earlier SAFE or note assumed, which is why the clause matters even for companies that still think of themselves as 'pre-priced-round.'

Model a down round before you sign one

Founder Runway runs a 20-turn arc from Pre-Seed to Series A, and one of the scenarios that shows up on a rough run is exactly this: a down round with an anti-dilution clause already sitting in an earlier term sheet. The turn forces the same trade-off real founders face — take the cheap capital and watch an old investor's ratchet eat into your stake, or hold out for a cleaner round you might not get.

Running that decision in a simulation first, where the only cost is a turn, is a cheap way to feel how a clause you barely negotiated at Seed can decide who actually owns the company two rounds later.

Bottom line

Full ratchet and weighted-average anti-dilution both protect investors from a down round, but they don't cost founders the same amount: full ratchet reprices an investor's entire stake to the new low price regardless of round size, while broad-based weighted average blends the old and new price by how much money actually came in. Push for broad-based weighted average in every term sheet, check whether an earlier round already carries full ratchet before you price a new one, and model the dilution before you sign — not after.