What is an anti-dilution agreement?
An anti-dilution agreement: more commonly called an anti-dilution provision embedded in a preferred-stock charter: protects an existing investor’s economic interest from being diminished when the company issues new equity at a lower price (a down round). The two main mechanics are broad-based weighted average (the market standard) and full-ratchet (more investor-favourable).
Weighted-average anti-dilution adjusts the conversion ratio of preferred stock based on a formula reflecting both the down-round price and the size of the new issuance; in the broad-based version, the new issuance is weighed against all outstanding shares — common, preferred and the option pool. Full-ratchet anti-dilution simply resets the conversion price to the down-round price, regardless of issuance size, and is rare outside distressed scenarios.
Full-ratchet vs weighted-average, and what it costs founders
Anti-dilution clauses come in two main flavours, and the difference is dramatic. A full-ratchet provision reprices the investor’s earlier shares as if they had paid the new, lower price, which transfers a large amount of value away from founders in a down round. A weighted-average provision: far more common and more balanced: only adjusts the conversion price in proportion to how much new, cheaper stock is issued relative to the existing base. Well-drafted clauses also carve out events that should not trigger adjustment, such as shares issued under an approved option pool, on conversion of existing convertibles, in connection with M&A, to strategic partners in commercial transactions, or in equipment-lease, lending or warrant transactions; the scope of those carve-outs is heavily negotiated and material to the economics of the protection. Founders should model the impact of each formula on a realistic down-round before agreeing, because the wording chosen at the term-sheet stage can quietly decide who controls the company after a tough financing.
The mathematical effect
The gap between the two formulas is easiest to see on a worked case. Take a $10M post-money Series A with 5M shares outstanding (including 2M founder common), followed by a $1M Series B at half the Series A price. On those facts, broad-based weighted-average adjustment yields perhaps 15–25% additional preferred dilution; full-ratchet on the same scenario yields 50%+ additional preferred dilution, transferring meaningful economic value from common to preferred shareholders for a relatively small dilutive event.
Anti-dilution for Turkish founders
For Turkish founders, anti-dilution protection is particularly consequential because the path from seed to growth often includes 3–5 financing rounds across 4–8 years, with significant macro-volatility creating elevated down-round risk relative to U.S./EU peers. Vircon Legal advises founders on anti-dilution negotiation: securing broad-based weighted average as the structural default, maximising carve-out scope, resisting full-ratchet pressure even in distressed scenarios, and modelling cumulative dilution-adjustment scenarios across the projected multi-round capital plan.