What is anti-dilution protection?

Anti-dilution provisions adjust preferred shareholders' conversion price when the company later sells shares at a lower price, giving earlier investors more common shares on conversion to offset the markdown. They activate in down rounds.

The standard formula is broad-based weighted average, which adjusts moderately based on the size and price of the down round. Full ratchet — repricing earlier investors entirely to the new lower price — is punitive to founders and rare outside distressed situations.