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. Full-ratchet anti-dilution simply resets the conversion price to the down-round price, regardless of issuance size, and is rare outside distressed scenarios.