Deep Dives 11 min read Published April 19, 2026

Anti-Dilution Provisions: How Broad-Based Weighted Average Actually Works

Anti-dilution protects investors when a down round occurs. Broad-based weighted average is founder-friendly and standard. Full ratchet is toxic for founders and should never be accepted. This guide explains the formula, walks through a worked down-round example, and shows exactly why full ratchet destroys founder ownership.

Key Takeaways

Broad-based weighted average is fair. Full ratchet can 2-3x dilute founders for nothing they did wrong. Always push for broad-based or single-trigger carve-outs.

What Anti-Dilution Does

Anti-dilution protects investors against a down round, where a company raises capital at a lower valuation than the previous round. If Series A invested at £8M pre-money and Series B raises at £4M pre-money, that is a 50% down round. Series A investors are upset because the value of their shares has effectively halved. Anti-dilution gives Series A the right to adjust their conversion price downward to compensate for the down round.

The key insight: anti-dilution is not about preventing down rounds or changing the valuation. The Series B round happens at £4M regardless. Anti-dilution simply adjusts how many shares existing investors receive when they convert their preferred stock to common. It protects their ownership percentage or effective purchase price.

There are two main anti-dilution mechanisms: broad-based weighted average (founder-friendly, standard) and full ratchet (founder-hostile, rare but dangerous).

Broad-Based Weighted Average (The Market Standard)

Broad-based weighted average adjusts an investor's conversion price based on the dollar-weighted average price of all shares issued. The formula is complex but the intuition is simple: if you invested at £8 per share and later rounds come in at £4 per share, your effective price gets adjusted downward, but not all the way to £4 because you are being averaged with other investors and rounds.

The formula: New conversion price = (Previous shares outstanding * Previous price) + (New shares being issued * New price) / (Previous shares outstanding + New shares being issued)

This is the dollar-weighted average of all shares across all rounds. Let us work through a concrete example.

Worked Example: Series A Down to Series B

Starting position:
- Series A raised £8M at £8M pre-money valuation
- This means: 1M shares outstanding at £8 per share
- Series A invested £8M, receiving 1M shares
- Founders own 8M shares (common stock), 80% of the company
- Total shares before down round: 9M (1M Series A preferred, 8M common founder)
- Total valuation: £72M (9M shares * £8 per share)

Down round happens:
- Series B raises £4M at £4M pre-money valuation
- This means: 1M shares outstanding at £4 per share (the pre-money)
- The down round is 50% of Series A price (£4 vs £8)
- Series B invests £4M, receiving 1M shares
- New total shares after Series B issuance: 10M
- New company valuation post-money: £8M (before adjustments)

Under broad-based weighted average, Series A's conversion price is adjusted. The new weighted average price is calculated as:
New price = (1M shares * £8) + (1M new shares * £4) / (1M + 1M)
New price = (£8M + £4M) / 2M = £6 per share

Series A's conversion price drops from £8 to £6. They now receive additional shares to compensate: (£8M investment / £6 new price) = 1.33M shares (vs 1M before). Founders' ownership is diluted from 80% to 8M / (8M + 1.33M + 1M Series B) = 8M / 10.33M = 77.4%. That is a 2.6 percentage point dilution. That is reasonable and fair.

Full Ratchet (The Destroyer)

Full ratchet says: if a down round occurs, existing investors' conversion price resets all the way to the down-round price, regardless of their original investment price. It is binary. No averaging. No calculation. Just: down round price becomes your new price.

Using the same example:
- Series A invested at £8 per share
- Series B comes in at £4 per share
- Full ratchet: Series A's conversion price resets to £4
- Series A now owns (£8M / £4) = 2M shares (vs 1M before)
- They doubled their shares for nothing

Founders' new ownership: 8M / (8M + 2M + 1M) = 8M / 11M = 72.7%. Founders lost 7.3 percentage points of ownership. In a company that raised multiple rounds and had multiple down rounds, this compounds. A founder who owned 60% after Series A might own 40% after a Series B and C with full ratchet clauses.

Full ratchet is devastating because it effectively punishes founders for something outside their control. The market conditions changed, not the founder's execution. And yet, founders get hammered.

Why Broad-Based is Standard (and Full Ratchet is Rare)

Most investors accept broad-based weighted average because it is perceived as fair. It protects investors against down rounds but does not over-punish founders. It is also the default in most venture financing documents and standard VC contracts.

Full ratchet is rare because: (1) Most professional VCs view it as excessive, (2) Founders push back hard when they see it, and (3) It can create bad incentives (if a founder knows a down round is coming, they might exit early to avoid the dilution, which is bad for the company). Full ratchet occasionally appears in debt-like instruments (convertible notes) or in situations where an investor is doing a rescue round and needs heavy protection, but it is almost never in clean equity rounds.

However, every founder has seen a full ratchet clause. Every term sheet should be reviewed for it. And if you find one, it should be a major red flag.

Single-Trigger Carve-Outs

Some investors negotiate single-trigger carve-outs: anti-dilution only applies if the down round is caused by specific events (eg. key employee departure, failed product milestone, customer loss). If the down round is due to market conditions (recession, market crash), anti-dilution does not trigger. This is founder-friendly and worth negotiating for.

How to Negotiate Anti-Dilution

Rule 1: Always push for broad-based weighted average if anti-dilution is being negotiated at all. It is the market standard and most investors will accept it.

Rule 2: If an investor insists on full ratchet, ask why. Is there a concern about execution risk? Are they pricing in the possibility of a significant down round? Understanding their concern allows you to address it, maybe with a different carve-out or a lower share commitment.

Rule 3: Push for single-trigger carve-outs. If the down round is due to market conditions (not your fault), you should not be penalised. Many investors will agree to this if you frame it as: "Let us align on protection only for company-specific failure scenarios, not for macroeconomic factors beyond our control."

Rule 4: If you have multiple term sheets, use this as a comparison point. "Investor A is offering broad-based weighted average with a single-trigger carve-out. Can you match that?" Most investors will.

Rule 5: Model the down-round scenario. Run the maths assuming a 30% and 50% down round under both broad-based and full ratchet. Calculate your ownership dilution. Know the cost before you negotiate.

The Bottom Line

Anti-dilution is a technical term that impacts real ownership and upside. Broad-based weighted average is fair and standard. Full ratchet is toxic and should be avoided at any cost. In a typical Series A to Series B down-round scenario, full ratchet can cost founders 5-10% of ownership, which at a £50M+ exit is worth millions of pounds. Understand the difference. Negotiate hard. Get legal help to review and model the scenarios.

About the author

Yanni Papoutsis is the author of the Ready Series and a Finance and Strategy executive with a Master's in Finance and Leadership. Having raised across multiple rounds alongside investors including Creandum, Profounders, B2Ventures, and Boost Capital, and contributed to a successful exit, Yanni works with early-stage founders on financial modelling, fundraising preparation, and marketplace analytics. Connect on LinkedIn

Benchmarks: What Good Actually Looks Like

SaaS benchmarks vary significantly by segment, go-to-market motion, and contract size. For SMB SaaS with monthly contracts: monthly logo churn of 2-4% is typical, below 2% is excellent. For mid-market SaaS: annual logo churn of 10-15% is normal, below 10% is strong. For enterprise: annual logo churn below 5% is expected.

Net Revenue Retention is the metric that separates good SaaS from great SaaS. Below 100% means you are shrinking your existing base even as you add new logos a structural problem. 100-110% is healthy. 120%+ is outstanding and signals genuine product stickiness with expansion opportunity. The best SaaS businesses (Snowflake, Datadog in their growth phase) have sustained NRR above 130%.

CAC payback period benchmarks: for SMB SaaS, under 12 months is excellent, 12-18 months is acceptable. For mid-market, under 18 months is strong. For enterprise, 24-36 months is normal given longer sales cycles, though enterprise LTV is correspondingly higher. The LTV:CAC ratio below 3:1 is a red flag; 4:1+ is what investors want to see, with a clear path to improvement as the business scales.

Gross margin is the foundation of all other SaaS metrics. Below 60% suggests infrastructure costs that need engineering attention. 70-75% is standard. 80%+ is excellent and gives you the unit economics to sustain aggressive growth investment without burning excessive capital. Below 50% typically indicates professional services revenue diluting the overall margin separate and report these lines clearly.

How to Present This Metric to Investors

Context matters more than the number. A 15% annual churn rate in an SMB market with a $50 ACV and 30-day cancellation windows is very different from 15% churn in an enterprise market with $50K ACVs and 12-month contracts. When you present your metrics, lead with the context that makes your number interpretable: what is your average contract value, what is your median customer tenure, and what is your go-to-market motion.

Show trends, not snapshots. A metric that was 18 months ago and is 10% today tells a powerful story about systematic improvement. A metric that was 8% 18 months ago and is 10% today raises an immediate question about what changed. Investors model trends forward; give them a trend that supports their thesis.

Segment before you present. Blended metrics almost always obscure important patterns. If your top-quartile customers have NRR of 140% and your bottom-quartile customers are churning at 30%, the blended number is misleading. Show the segmentation, explain what drives it, and articulate the plan to shift customer mix toward the higher-performing segment. This kind of analytical rigor builds confidence.

Frequently Asked Questions

How much detail should my financial model include?: Enough to demonstrate that you understand your unit economics and cost structure, but not so much that navigating the model requires a manual. The test: can an investor who has never seen your business understand the key assumptions and how they drive the output within 10 minutes? If yes, the model has the right level of detail. Build the complexity behind the scenes if you need it; present the clarity on the surface.
When should I share my financial model with investors?: Share the model after a first meeting has gone well and there is clear interest. Sending your full model as part of an initial cold outreach buries the key insights in complexity. Lead with the summary metrics (ARR, growth rate, burn, runway, NRR) in the deck; share the full model when an investor asks, which signals real engagement.
How do investors check whether my projections are credible?: They benchmark against comparable companies at your stage, check the internal consistency of your model (does headcount scale sensibly with revenue, do COGS move in the right direction with volume), and stress test the key assumptions. The question they are asking is not "will these exact numbers come true" they know they will not but "does this team think rigorously about their business and understand what drives it?"
What is the biggest red flag in a startup's financials?: Inconsistency between what founders say and what the numbers show. If the pitch says strong retention but the cohort data shows declining NRR; if the growth narrative is compelling but the CAC data shows customer acquisition is getting harder and more expensive; if the gross margin story is software-like but the actual margin is 45% because of significant services delivery these gaps between narrative and data destroy credibility quickly.