Anti-dilution

An investment contract cannot guarantee a future price. An investor commits money at a set price per share, and that price is only what the company looked worth on that day. Buy in at $8 a share and watch the next round open two years later at $4, and someone arriving behind you gets twice the stock for the same money. The party that came in earlier, when far less was proven, paid the higher price.

Dilution on its own isn't a problem. It describes existing shareholders holding a smaller percentage after new shares are issued, and when the company gets more valuable on the way there, the smaller slice points at a larger number. Fourteen percent of a $15 million company beats twenty percent of a $3 million one. The painful case is dilution at a falling price, where the percentage and the amount shrink together.

So the same argument kept surfacing in every negotiation. The investor says the asking price looks high; the founder says that price is what pays for the next round of hiring. Drop the price and the founder takes the dilution immediately. Hold it and the investor carries the risk of the next few years alone. Anti-dilution settles the argument by leaving the price where the founder put it and correcting only if the price later falls.

What gets adjusted is not the shares already issued but the conversion price. Investors receive preferred stock — shares carrying rights ahead of common stock on dividends and on liquidation — which converts into common stock later. The conversion price sets how many common shares that becomes. Lower the conversion price and the same investment converts into more common stock.

The clause triggers on a down round, a financing priced below the previous one. Two formulas exist.

1. Full ratchet. The conversion price drops all the way to the new round's price per share. An investor holding a conversion price of $8 sees it reset to $4 when the new round prices there, doubling the common stock they receive. It is the best outcome for the investor and the worst for the founding team.
2. Weighted average. The conversion price falls only in proportion to how much of the company the new shares represent. A company with 1,000,000 shares outstanding that issues 200,000 new shares at $4 moves the conversion price from $8 to about $7.33, roughly nine percent more common stock rather than a hundred percent more. This is the version that actually gets signed.

Those extra shares come from somewhere. The company issues them, total share count rises, and everyone without the clause holds a smaller percentage afterward — founders, employees, and the option pool set aside for people not yet hired. The protection isn't created. It moves from one side of the table to the other.

The clause first gets written into the term sheet, the one- or two-page document that settles the headline terms before the full contract is drafted. Whatever is agreed there carries into the investment agreement almost verbatim. The argument happens when the money arrives; the effect appears years later. That gap is why the line slips through quickly in the room and comes back heavy afterward — nobody at the table expects a down round while they are pricing an up one, so the formula gets treated as paperwork rather than as the thing that decides who absorbs the next disappointment.

Down rounds aren't the only trigger. A bridge round, raised quickly because the cash won't stretch to the next proper financing, runs the same math if its price per share lands below the last one.

A list of exceptions is written alongside it, because a clause that fired on every share issuance would freeze the company. The usual carve-outs are these.

1. Shares going to employees out of the option pool, so that hiring doesn't reprice anyone's conversion.
2. Shares issued as payment when acquiring another company.
3. Small share grants attached to bank loans or equipment leases.

Two things get negotiated in practice. One is countering a full ratchet request with weighted average. The other is attaching a condition that an investor who doesn't participate in the next round loses the protection, which stops anyone from collecting the correction while declining to put in more money when the company needs it.

"Let's do broad-based weighted average on anti-dilution. Full ratchet is a hard no."

A counter-proposal to make the adjustment as small as the formulas allow.

"This round prices below the last one, so the Series A conversion price adjusts."

Notice that the clause has actually fired, and the capitalization table has to be recalculated.

"Put option pool issuances on the carve-out list."

A request to keep hiring from triggering the clause.

When Pagedeck received its Series A term sheet, this clause was the line Grace held onto longest. The amount and the valuation were agreed in two days; this one line took a week. The first draft came back as full ratchet, and Grace built a table showing where founder and employee ownership landed if the next round opened even slightly lower. In the column assuming a thirty percent drop, the founding team's combined stake fell by double digits.

What got signed was weighted average with the participation condition attached. What Grace took away was a sense of how far one clause reaches: it rewrites a table several years out.

The most common reading is that the clause holds an investor's percentage steady. The name says it prevents dilution, so that follows naturally. But all it touches is the conversion price in the case where the price falls. Ordinary dilution, the kind that happens while the company gets more valuable, lands on the investor too. Keeping a percentage fixed requires a separate right to buy enough of each new issuance to stay level. Confuse the two and you watch the percentage drop round after round and conclude the clause is broken.

The other reading is that it's purely a founder's loss. It does dilute the founding team when it fires, so it looks that way. In practice the clause is part of why the current price can be as high as it is: without it, an investor prices the downside risk in today instead. Trying to strike it entirely gets less than swapping full ratchet for weighted average and widening the carve-out list. Fight the clause itself and the negotiation stretches until there's no attention left for valuation and board composition, which matter more.