Weighted-Average Anti-Dilution

Weighted-average anti-dilution is the modern standard anti-dilution provision in venture-backed preferred stock. It adjusts the conversion price of the preferred series downward when the company issues stock at a lower price, with the adjustment calculated by a formula that weighs the size of the down round against the total cap table to produce a partial (not full) adjustment. It is the more founder-friendly of the two main anti-dilution flavors and the default in modern venture term sheets, sitting between no protection (rare) and full-ratchet (investor-friendly, increasingly limited to distressed situations).

The weighted-average formula:

• NCP = OCP x ((A + B) / (A + C))
  • NCP = new conversion price
  • OCP = old conversion price
  • A = shares outstanding before the down round
  • B = consideration received in the down round divided by OCP (i.e., shares that would have been issued at the old price)
  • C = actual shares issued in the down round at the new lower price

The structural intuition: the adjustment is proportional to the size of the dilution relative to the existing cap table. A small down round produces a small adjustment; a large down round produces a larger adjustment. The investor gets some protection but doesn't get the full punitive ratchet of full-ratchet anti-dilution.

Concrete example: company has 10M shares outstanding at Series A conversion price of $10/share. Series B raises $5M at $5/share, issuing 1M new shares.

• OCP = $10
• A = 10M (shares outstanding before)
• B = $5M / $10 = 500K (shares that would have been issued at old price)
• C = 1M (actual shares issued in down round)
• NCP = $10 x ((10M + 500K) / (10M + 1M)) = $10 x (10.5M / 11M) = $9.55

So Series A's conversion price adjusts from $10 to roughly $9.55, a 4.5% adjustment. The Series A holder now converts at $9.55 instead of $10, gaining roughly 4.7% more common shares per preferred. The same scenario under full-ratchet: NCP would simply reset to $5 (the new lower price), a 50% adjustment. Series A would convert at $5 instead of $10, doubling their effective common-share count and proportionally diluting all common holders. The difference between weighted-average and full-ratchet outcomes is enormous in moderate-to-large down rounds.

Two sub-flavors of weighted-average:

• Broad-based weighted-average (modern standard, more founder-friendly): A in the formula includes the broad cap table (common, preferred on as-converted basis, outstanding options, warrants, and other convertibles). Larger A = smaller adjustment = less dilutive to common.
• Narrow-based weighted-average (slightly investor-friendlier): A includes only outstanding common and preferred (excluding options, warrants, convertibles). Smaller A = larger adjustment = more dilutive to common.

Standard carve-outs: the anti-dilution provision typically excludes shares issued under the option pool, M&A, strategic partnerships, conversion of pre-existing convertibles, and exercise of pre-existing warrants. Founders should push to keep the carve-outs broad.

What founders get wrong: Treating anti-dilution as a checkbox term rather than reading the actual formula and carve-outs. Broad-based vs narrow-based produces materially different outcomes in the same down-round scenario; carve-outs that aren't explicit can pull in option-pool issuances or M&A shares and trigger anti-dilution against transactions that shouldn't trigger protection. The right discipline: read the cert of incorporation (not just the term sheet summary), verify the broad-based denominator, verify the standard carve-outs are explicit, and model out the formula for a hypothetical down-round scenario before signing.

Related: Anti-Dilution Provisions · Broad-Based Weighted-Average · Full-Ratchet Anti-Dilution · Preferred Stock · Down Round

FAQ

What is weighted-average anti-dilution?
The modern standard flavor of anti-dilution protection in venture-backed preferred stock, adjusting the conversion price of the preferred series downward when the company issues stock at a lower price than the prior round, with the adjustment calculated by a formula weighing the size of the down round against the total cap table. Produces a partial (not full) adjustment.

How is the weighted-average formula calculated?
NCP = OCP x ((A + B) / (A + C)), where NCP is the new conversion price, OCP is the old conversion price, A is shares outstanding before the down round, B is the consideration received divided by OCP, and C is actual shares issued in the down round. Broad-based variant uses a larger A (including options, warrants, convertibles), producing a smaller adjustment.

Why is weighted-average preferred over full-ratchet?
Because weighted-average produces moderate, proportional adjustments in down rounds, while full-ratchet resets all prior preferred to the new (lower) price regardless of round size, producing massive dilution of common stock and founders for relatively small new capital. Weighted-average gives investors reasonable protection without the punitive effect on common.