Weighted Average Anti-Dilution
An anti-dilution formula that partially adjusts the conversion price based on the size of the down round.
Definition
Weighted average anti-dilution adjusts the conversion price of existing preferred stock based on a formula that considers both the lower price and the relative size of the new down round. A small down round has a small effect; a large down round has a bigger effect. The two variants are broad-based (includes all fully diluted shares in the denominator, more employee-friendly) and narrow-based (excludes certain shares, harsher for employees).
Why it matters
Weighted average is the standard and most common anti-dilution protection. It is much better for employees than full ratchet because the adjustment is proportional. If your company's investors have broad-based weighted average anti-dilution, you are in the best common-case scenario.
Example
Series A at $5/share for $10M (2M shares). Down round at $2/share raises $3M (1.5M new shares). Broad-based weighted average adjusts the Series A conversion price to about $4.33/share instead of the full ratchet $2/share, resulting in significantly less dilution for employees.