Anti-Dilution
Investor protections that adjust their share price downward if a down round occurs.
Definition
Anti-dilution provisions protect preferred stockholders (investors) from losing value in a down round. When a company raises at a lower price than a previous round, anti-dilution clauses adjust the conversion price of existing preferred shares downward, effectively giving those investors more shares. This extra protection comes at the expense of common stockholders, including employees.
Why it matters
Anti-dilution provisions shift the pain of a down round onto common stockholders (you). In a severe down round, anti-dilution adjustments can significantly increase your dilution, sometimes making employee options nearly worthless.
Example
An investor bought Series A preferred at $5/share. A down round prices at $2.50/share. With weighted-average anti-dilution, the investor's conversion price drops to $3.50, giving them 43% more shares than they originally had. Those extra shares dilute common holders.