Anti-dilution
A preferred-stock protection that grants extra conversion shares if a later round prices below what the investor paid.
Anti-dilution protection adjusts the rate at which preferred stock converts into common when the company later sells shares below the price that preferred paid. It does not stop dilution from new shares being issued, which ordinary pro rata arithmetic governs; it specifically compensates price-based dilution, the loss of value from a cheaper round.
The mechanism is the conversion price. Preferred shares convert to common at a ratio of original price over conversion price; lowering the conversion price raises the number of common shares received. Full ratchet resets the conversion price to the new round’s price, however few shares that round sold, as if the protected investor had invested at the lower price all along. Weighted average adjusts proportionally, blending the old price and the new price by the relative sizes of the existing capitalization and the cheap issuance; the broad-based variant counts the fully diluted capitalization in that blend, which softens the adjustment, and is the standard.
Carve-outs matter: option pool grants, conversion of existing instruments and similar issuances are customarily exempt, so routine operations do not trigger the clause. Because every extra as-converted share for protected preferred comes out of common, the founders absorb both the down round and the adjustment; that double hit is why the form of this clause deserves negotiation time that founders usually spend elsewhere.
Long technical horizons raise the odds that some round along the way prices down: markets turn faster than hardware roadmaps. That makes the form of anti-dilution a first-order term for a quantum founder, not boilerplate. A full ratchet accepted at seed compounds viciously across the three or four rounds a hardware company needs; broad-based weighted average is the market norm and the only version to accept without a fight.
An investor paid $2,000,000 at $2.00 per share, 1,000,000 preferred shares. A down round later prices shares at $1.00. Full ratchet: the conversion price resets to $1.00 and the preferred now converts into 2,000,000 common, doubling that investor's as-converted shares at the founders' expense. Broad-based weighted average: the conversion price moves only part of the way down, in proportion to how large the cheap round is relative to the whole capitalization, landing between $1.00 and $2.00. Put numbers on it: with 10,000,000 shares already outstanding and the down round raising $1,000,000 at $1.00 (1,000,000 new shares), the broad-based formula resets the conversion price to $2.00 × (10,000,000 + 500,000) / (10,000,000 + 1,000,000), about $1.91, barely moved, where full ratchet slammed it to $1.00.
From definition to decision
Model this in your own round, scenarios, dilution and runway, in the founder workspace.