Anti-dilution protection adjusts an investor’s conversion terms if the company later sells stock at a lower price than the investor paid. It cushions the investor against a down round.

Founders meet this term in the priced round. It does not stop dilution from new shares. It protects the price at which preferred stock converts to common, which can shift ownership toward the protected investors if a later round prices down.

Broad-based weighted average (the standard)

The market-standard form is broad-based weighted average. It adjusts the conversion ratio using a formula that accounts for both the lower price and how many shares are issued, so the adjustment is proportionate and relatively mild. Founders should push for broad-based, which is the default in the NVCA model documents.

Full ratchet (the harsh form)

The harsh form is full ratchet. It resets the earlier investor’s conversion price all the way down to the new, lower price, regardless of how few shares are sold. Full ratchet can transfer a large amount of ownership away from founders and common holders in a down round, so it is worth resisting.

Anti-dilution terms live in the certificate of incorporation and interact with the cap table. This is a general explanation, not legal advice.