What is anti-dilution protection and how does it work?
By SuLe · Updated 8 May 2026
Anti-dilution protection adjusts an investor's preference-share conversion — or triggers extra shares — if your company later raises money at a lower price per share, a "down round". It compensates the investor for the fall in value, at the expense of the existing shareholders. The formula you agree decides how painful that compensation is.
Key facts
- Anti-dilution only bites on a "down round" — a later raise at a lower price per share than the investor paid.
- Broad-based weighted average is the standard, proportionate formula in UK venture deals.
- Full ratchet — repricing the investor's shares to the new low price — is aggressive and rare in the UK.
- The adjustment dilutes existing shareholders, chiefly the founders and the option pool.
- Many UK seed rounds on ordinary shares carry no anti-dilution at all.
What triggers anti-dilution protection?
Anti-dilution is triggered by a down round: issuing new shares at a lower price than a protected investor paid. If your next raise is at a flat or higher price, the protection does nothing.
Its purpose is to cushion an investor who paid a premium in an earlier round from being diluted by cheaper shares later. Without it, their expensive shares would sit alongside cheap new ones at the same rank.
The protection works by adjusting the rate at which their preference shares convert into ordinary shares — effectively giving them more ordinary shares than their original price would allow.
What is the difference between weighted average and full ratchet?
Weighted average adjusts the investor's conversion price partway, weighting the adjustment by how large the down round was relative to the company. A small discounted raise causes a small adjustment; a large one causes more. "Broad-based" means the whole share count, including options, is used in the formula, which softens the effect.
Full ratchet is the blunt version: it repriced the investor's shares as if they had paid the new, lower price for their entire holding, regardless of how few cheap shares were issued. It transfers far more value.
Broad-based weighted average is the standard UK formula. Full ratchet is aggressive and uncommon here — treat a request for it as a red flag worth challenging.
Who actually pays for it?
The existing, unprotected shareholders pay — principally the founders and the option pool. The adjustment issues the protected investor more ordinary shares (or lowers their conversion price to the same effect), and those shares dilute everyone without protection.
So anti-dilution does not create value; it reallocates it, away from founders and staff and toward the protected investor. On a steep down round with full ratchet, that reallocation can be severe.
This is why the down round itself is worth avoiding where you can, and why the formula matters. Weighted average shares the pain proportionately; full ratchet concentrates it on you.
Where does UK law fit?
Anti-dilution is a contractual right written into your articles of association, operating within the Companies Act 2006 rules on share classes and allotments. Implementing an adjustment means issuing shares or amending rights, with the usual resolutions and Companies House filings.
Note the interaction with pre-emption rights: statutory and contractual pre-emption already give existing holders first refusal on new shares, which is a different, milder protection. UK venture terms commonly follow the BVCA model documents, whose default anti-dilution is broad-based weighted average.
| No anti-dilution | Weighted average | Full ratchet | |
|---|---|---|---|
| Triggers on | — | Down round | Down round |
| Adjustment size | None | Proportionate to the raise | Full reprice to new low price |
| UK norm? | Common on ordinary-share seed deals | Standard where preference shares are used | Aggressive and rare |
| Founder impact | None | Moderate | Severe |
Worked example
Priya's fintech startup raises a Series A: a fund invests £2m for 1,000,000 preference shares at £2.00 each. A tough year later, she is forced into a down round at £1.00 per share.
Under full ratchet, the fund's conversion price drops to £1.00, so their preference shares now convert into roughly 2,000,000 ordinary shares instead of 1,000,000 — doubling their stake and heavily diluting Priya and the option pool.
Under broad-based weighted average, the adjustment is far smaller: the conversion price falls only part-way toward £1.00, weighted by how many cheap shares were actually issued against the whole share base. The fund gains some extra shares, but nothing like double.
Where founders go wrong
Agreeing to full ratchet
— it concentrates all the down-round pain on you; insist on broad-based weighted average instead.Ignoring anti-dilution because "we'll never do a down round"
— markets and plans slip, and the term only matters precisely when things are hard.Confusing anti-dilution with pre-emption
— pre-emption is a mild right of first refusal; anti-dilution reprices and can dilute you heavily.Not modelling a down round
— run the adjustment before signing so you know what a bad raise would do to your cap table.
Related questions
What does anti-dilution protection do?
It protects an investor if you later raise money at a lower price per share — a "down round". Their preference shares convert into more ordinary shares to compensate for the drop, cushioning the value of their earlier, more expensive investment at the existing shareholders' expense. [More: What is a down round and what does it trigger?]
What is the difference between weighted average and full ratchet?
Weighted average adjusts the investor's conversion price partly, factoring in how big the down round was, so the compensation is proportionate. Full ratchet repriced their shares as if they had paid the new lower price all along — a far more aggressive adjustment that is rare in the UK. [More: What is a ratchet?]
Is anti-dilution standard in UK deals?
Some form of anti-dilution is common where preference shares are used, and broad-based weighted average is the usual formula. Full ratchet is uncommon and investor-aggressive. Many UK seed rounds on ordinary shares have no anti-dilution at all.
Who pays for anti-dilution?
The existing shareholders — mainly the founders and the option pool. The adjustment issues the protected investor extra shares, or lowers their conversion price, which dilutes everyone who is not protected. That is why the formula you agree matters so much on a down round.
Anti-dilution is dormant until the worst possible moment — a down round — and then the formula you signed years earlier decides how much of the pain lands on you. A SuLe solicitor can check the formula, model a down round, and push back on full ratchet before it is in your articles. Book a free term sheet review and understand the clause.
Keep reading: What is a ratchet? · What is a down round and what does it trigger? · What is a liquidation preference? · What are pre-emption rights — and how are they disapplied? · Ordinary shares vs preference shares in UK startups — what's the difference? · What founder protections should I negotiate in a term sheet?
Primary sources: BVCA — model documents for UK venture capital · Companies Act 2006
