Narrow-Based Anti-Dilution
The harsher weighted-average formula using only outstanding preferred shares in the calculation.
Definition
Narrow-based weighted average anti-dilution uses a smaller denominator in its conversion price formula, typically only counting outstanding preferred shares rather than all fully diluted shares. Because the denominator is smaller, the conversion price adjustment in a down round is larger, creating more dilution for common stockholders. Narrow-based is less common and considered investor-aggressive.
Why it matters
Narrow-based anti-dilution creates more dilution for employees in a down round than broad-based. If you see narrow-based anti-dilution in your company's terms, the impact of any future down round on your equity will be more severe.
Example
Same down round scenario: broad-based adjusts investor conversion price from $5 to $4.50. Narrow-based adjusts to $4.20, which means each preferred share converts into 1.19 common shares instead of 1.11. On 2M preferred shares, that is 160K additional dilutive shares to employees.