TLDR:
Broad-based weighted average is an anti-dilution formula that adjusts the conversion price of preferred stock based on the total number of fully diluted shares outstanding, providing less protection to investors than the full ratchet method.
Formula Concept
New conversion price = Old conversion price × (Old shares + New shares at old price) / (Old shares + Actual new shares issued)
How Broad-Based Weighted Average Works
The broad-based weighted average anti-dilution formula uses the total number of fully diluted shares (including all options, warrants, and convertible securities) as the denominator when calculating the adjusted conversion price. This means the dilutive adjustment is spread across a larger base, resulting in a smaller price reduction compared to the narrow-based weighted average (which uses only outstanding shares) or the full ratchet (which adjusts to the lowest price with no weighted averaging). The formula is typically: NCP = OCP × (OS + NSP) / (OS + NS), where NCP = new conversion price, OCP = old conversion price, OS = old shares outstanding, NSP = new shares at old price, NS = actual new shares issued.
Founder Preference
Mechanics of Broad-Based Weighted Average
The broad-based weighted average formula adjusts the conversion price based on both the size of the dilutive issuance and the total shares outstanding (including the option pool, on a fully-diluted basis). The “broad” denominator includes more shares (reducing the dilutive impact), making it more founder-friendly than narrow-based variants which exclude certain share categories. The formula is: New Conversion Price = Old Conversion Price × (A + B) / (A + C), where A is shares outstanding on an as-converted basis, B is the consideration received divided by the old conversion price, and C is the new shares issued. Modern venture financings overwhelmingly use this variant rather than full ratchet.