Anti-Dilution Clause

Anti-dilution protection is a clause investors include in funding agreements to shield their shares from losing value when a startup raises money at a lower valuation ("down round") than its previous funding. Basically, they're protections keeping investors from getting absolutely hammered when things don't go according to plan and valuations slip.

As a founder, understanding these provisions is critical—it's not just legalese. Anti-dilution can significantly affect both your own stake and how easy it'll be to raise future rounds. If you agree to overly aggressive protections early on, you could hamstring your ability to raise money later, or worse, dilute your founding team's equity into oblivion (hardly inspiring for the team burning the midnight oil daily).

Say your startup raises a $3M Series A at a $12M valuation (post-money), giving your investor 25% ownership with an original share price of $1 per share (3M shares into a company that, after funding, has 12M total shares).

Fast forward a year, growth stalls, market softens, and now your Series B investors are only willing to invest at a lower $10M pre-money valuation. They buy half the startup, investing $10M at just $0.83 per share. Your Series A investor, who skipped this round, sees their 25% ownership now worth less—just $2.5M instead of their original $3M.

This is exactly the scenario anti-dilution protections aim to buffer against.

Two types you’ll likely come across:

Let's go back to the example. Without protection, your first investor's shares are worth $2.5M post-Series B. But using full-ratchet protection, their original shares become 3.6M (not 3M), preserving their investment value at close to $3M. Weighted average protection would adjust them to roughly 3.27M shares, landing them at around $2.71M in value—still a hit, but less painful.

You might hear the terms "broad-based" and "narrow-based" weighted average. Put simply:

Given the choice, pushing for broad-based terms is safer as a founder, helping you to retain more control and flexibility in later fundraising rounds.

Getting these clauses right from day one can make or break your startup’s trajectory. Here’s the no-fluff breakdown:

Bottom line: always negotiate anti-dilution provisions carefully, keeping future rounds and equity incentives in mind. Not doing so risks sending your startup down a turbulent path of acrimonious investor battles, painful dilution, and delayed funding rounds—none of which you'll have the time (or the cash runway) to deal with as a scrappy, resource-constrained early-stage founder.

Keep readindg Arageek's Founder Handbook and don't forget Startup journey rule #1: protect yourself and your company's equity at every step.

Understanding anti-dilution clauses is a big part of how you acheive that (and stay sane doing it).