Anti-dilution provisions adjust the conversion price of preferred stock if the company issues new shares at a lower price than a prior round (a 'down round'). The most common formula is 'broad-based weighted-average,' which partially compensates earlier investors. 'Full ratchet' fully repriced and is investor-friendly but rare. Broad-based weighted average counts all outstanding shares, including options, so its adjustment is milder than the narrow-based version. Full ratchet resets the conversion price to the new lower price no matter how many shares are issued. Standard carve-outs stop option grants and certain strategic issuances from triggering an adjustment.

Why it matters

MedTech down rounds are common after disappointing trial readouts or FDA delays. Anti-dilution math meaningfully redistributes ownership in those moments.

Common pitfalls

•Misunderstanding the specific anti-dilution formula can lead to unexpected equity dilution for founders and early employees during a down round.
•Failing to negotiate clear anti-dilution terms upfront can create significant disputes and legal challenges during subsequent funding rounds.
•Assuming that anti-dilution provisions will fully protect all early investors overlooks the nuances of different formulas, such as broad-based weighted-average versus full ratchet.
•Overly aggressive anti-dilution terms can make it difficult to attract new investors in a down round, as it disproportionately impacts their potential ownership.

Sources

Cooley GO: anti-dilution · Cooley GO
NVCA Model Documents · NVCA
Silicon Valley Bank - Healthcare Reports · SVB
SEC capital-raising glossary: preferred stock and anti-dilution rights · U.S. Securities and Exchange Commission

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