Comparison
Full Ratchet vs Weighted Average Anti-Dilution: Key Differences Explained
Full ratchet anti-dilution reprices earlier investors' shares to match any lower-priced round — regardless of how small that round is. Weighted average anti-dilution adjusts the conversion price based on the size of the dilutive round, spreading the cost more fairly. Full ratchet is extremely investor-friendly and often deal-killing; weighted average is the standard in most venture deals.
What is Full Ratchet?
Full ratchet is the most aggressive form of anti-dilution protection. If a company issues new shares at a lower price than the preferred stock in a prior round (a 'down round'), full ratchet reprices the earlier investor's conversion price all the way down to the new, lower price — as if they had invested at the new price. This means the earlier investor gets a proportionally larger slice of the company, heavily diluting the founders and common shareholders. For example: an investor who paid $5/share in Series A gets full ratchet protection. The company then raises a down round at $2/share. Full ratchet reprices the Series A investor's conversion to $2/share — effectively doubling their share count at founders' expense. Full ratchet is increasingly rare in competitive markets and is often a signal of weak negotiating position.
What is Weighted Average Anti-Dilution?
Weighted average anti-dilution is the market standard. When a down round occurs, the conversion price of earlier preferred shares is adjusted downward — but the adjustment accounts for both the size of the down round and the amount of new shares issued. The formula considers the total shares outstanding and the size of the dilutive issuance. Broad-based weighted average (which counts all common shares, options, and warrants in the denominator) is more founder-friendly than narrow-based (which counts only preferred shares). Weighted average creates a fair compromise: earlier investors are partially protected from down-round dilution, but the protection is proportional to how dilutive the round actually is. The smaller the down round, the smaller the conversion price adjustment.
Key Differences
| Feature | Full Ratchet | Weighted Average Anti-Dilution |
|---|---|---|
| Protection strength | Maximum — converts at new low price | Partial — proportional to round size |
| Impact on founders | Severe dilution | Moderate, size-dependent |
| Market prevalence | Rare — founder-hostile | Standard in most VC deals |
| Small down round | Full repricing regardless of size | Small adjustment |
| Large down round | Full repricing | Larger adjustment (approaches full ratchet) |
| Negotiability | Often a red flag to push back on | Standard — negotiate broad vs. narrow-based |
When Founders Choose Full Ratchet
- →(Investor perspective) You're investing in a distressed situation where down-round risk is very high
- →You have enough leverage to demand it and the founder has few alternatives
- →(Founder warning) Avoid accepting full ratchet — it can make future rounds impossible
When Founders Choose Weighted Average Anti-Dilution
- →Standard institutional VC deals at Series A+
- →Any deal where you want to maintain a fair, investable cap table
- →When founders have options and market leverage to negotiate terms
Example Scenario
A company raised $5M at a $20M post-money (Series A, $1/share). The business struggles and raises a $1M down round at $0.40/share. With full ratchet: the Series A investor's conversion price drops to $0.40 — their 5M shares become the equivalent of 12.5M shares. Founders are massively diluted. With broad-based weighted average: the formula accounts for the small size of the down round — the new conversion price might be $0.75/share, giving the Series A investor fewer extra shares. The weighted average approach preserves some value for founders and makes it easier to attract new investors to the down round.
Common Mistakes
- 1Accepting full ratchet because you're desperate to close — it will haunt your future fundraising
- 2Not understanding the difference between broad-based and narrow-based weighted average — always negotiate broad-based
- 3Forgetting anti-dilution applies to conversion of preferred, not just current share counts
- 4Failing to negotiate anti-dilution carve-outs for employee option pool issuances
Which Matters More for Early-Stage Startups?
Weighted average is the only acceptable standard for companies that expect to stay venture-backed. If an investor insists on full ratchet, it's either a sign they have outsized leverage or they're unsophisticated — either way, it's worth pushing back hard. The right protection is broad-based weighted average, and the right carve-outs are employee option pool issuances and small strategic investments.