Series 2 · Term Sheets, Deconstructed · Post 7 of 9 · 8 minutes

Anti-Dilution: Weighted Average vs Full Ratchet

What the clause does

The previous piece in this series covered why investors ask for price protection. This one covers the arithmetic.

An anti-dilution clause is triggered when the company issues shares at a price below the conversion price of a protected series of preferred shares. The conversion price starts out as the price the investor paid and moves only if the clause has already been used, so for a first adjustment the comparison is with the price of the last round.

The adjustment does not issue the investor any new shares. It lowers the conversion price written into the share conditions, and because each preferred share converts into common at that price, a lower price means the same preferred shares convert into more common shares. Everything that follows is measured as converted, with every preferred share counted as the common shares it would become. The founders hold the same shares as before and own a smaller share of a larger total.

In a Canadian corporation the conversion right and the adjustment formula are part of the share conditions in the articles, which is where the CVCA model documents place them. They operate automatically when a triggering issuance closes. Changing them afterwards means amending the articles, which needs a special resolution of the shareholders and, where the change affects the rights of the protected series, a separate vote of that series.

Full ratchet

Under full ratchet the conversion price resets to the price of the new issuance, however small the issuance. Whether the company raises $10 million or $10,000 at the lower price, the protected investor’s conversion price becomes that price, and its preferred shares convert into as many common shares as its original investment would have bought at the new price. Partial ratchets, at a half or two thirds of the drop, exist and are rarely seen.

Weighted average

Weighted average lowers the conversion price in proportion to the size of the lower-priced issuance. The formula in the CVCA model term sheet, which follows the NVCA form used in the United States, is:

New conversion price = old conversion price × (A + B) ÷ (A + C)
A is the number of shares outstanding before the issuance, as converted and as exercised. B is the number of shares the new money would have bought at the old conversion price. C is the number of shares actually issued.

The lower the new price, the larger C is relative to B, and the more money raised at that price, the larger both are relative to A; either pushes the conversion price down. A price cut with little money behind it moves the price very little, which is the difference between this formula and a ratchet.

Broad-based or narrow-based. The two variants differ in what A counts. Broad-based counts every share on a fully diluted basis: common shares, preferred shares as converted, and options, warrants and other convertible securities as exercised or converted, which is how the CVCA model defines it. Narrow-based leaves out the options and convertibles and counts only the shares outstanding, and some narrow versions count less than that. A smaller A lowers the price further in every down round, so narrow-based is always the harder of the two; how much harder depends on what is left out. Add a 1,000,000-option pool to the example below and the broad-based price is $0.9583 against $0.9545 narrow-based, 1,043,478 shares on conversion against 1,047,619. The gap grows with the size of the pool and of the round.

The same down round, two outcomes

No option pool, to keep the arithmetic clean. Without any anti-dilution adjustment the founders would hold 9,000,000 of 11,000,000 shares after the round: 81.8 per cent. That is ordinary dilution, and the clause is not about it. The clause decides how much more the founders give up.

Under weighted average, A is 10,000,000, B is 500,000 (the shares $500,000 would have bought at $1.00) and C is 1,000,000: $1.00 × 10,500,000 ÷ 11,000,000 = $0.9545. The investor’s 1,000,000 preferred shares now convert into $1,000,000 ÷ $0.9545 = 1,047,619 common shares. Under full ratchet the price is $0.50 and the same preferred shares convert into 2,000,000.

The down round itself costs the founders 8.2 points, from 90.0 to 81.8 per cent. Weighted average costs them a further 0.35 points. Full ratchet costs them a further 6.8 points, about nineteen times as much; in shares, 1,000,000 against 47,619, twenty-one times as many.

Why the size of the round matters

The same company, the same $0.50 price, four sizes of round.

Full ratchet gives the same answer on every row: the price is $0.50 and the 1,000,000 preferred shares convert into 2,000,000, whether the company raised $500,000 or $5 million. Under weighted average the adjustment grows with the money raised, which is the point of the formula: the investor is compensated in proportion to how much of the company was sold at the lower price.

The carve-outs

The clause lists the issuances that do not trigger the adjustment, and the list is closed: an issuance not on it triggers the adjustment whether or not anyone intended that. The customary exceptions in the CVCA model term sheet are shares issued on conversion of the preferred shares themselves or as a dividend on them; shares issued on conversion of existing debentures, warrants, options or other convertible securities; shares issued on a split, dividend or subdivision; and shares or options issued to employees, directors and consultants under a plan approved by the board, with further exceptions in the model articles. The Venture Deals form adds shares issued for non-cash consideration in a board-approved acquisition and shares issued in an equipment, lease or bank financing approved by the board.

Two of these deserve a careful reading. Options are usually priced at the value of a common share, which is below the preferred price, so the employee carve-out should cover the plan as the board approves it from time to time and not only the pool reserved at closing; a grant outside the carve-out is a triggering issuance. And a convertible note or SAFE outstanding at the round, converting later at a discount, can be an issuance below the conversion price; the customary carve-out for conversions of existing convertible securities is what keeps it from triggering the adjustment. From the company’s side more exceptions are better, and most investors accept the customary ones without much argument.

The waiver

The clause commonly lets the holders of a majority of the protected series waive the adjustment for a particular issuance. Venture Deals describes the case it was written for, a follow-on financing at a lower price in which the larger investors agree to fund the company and vote to carve the round out of the adjustment, so that holders who decline to invest do not gain from an adjustment paid for by everyone else. The threshold is the number to read. A waiver that needs every holder gives each small holder a veto over a rescue round; a waiver by a majority of the series lets the investors who are funding the company decide.

How common is each formula in Canada

Osler’s Deal Points Report, published each spring from the financings its clients close (686 preferred share financings from 2021 to 2025 in the 2025 edition), calls broad-based weighted average anti-dilution the market standard in Canada. It appeared in 100 per cent of the 2025 financings in the report, in up rounds, down rounds and flat rounds alike, in 100 per cent in 2024 and in 99 per cent in 2023. The US surveys it cites put the figure at 96 to 100 per cent of US financings. Full ratchet did not appear in a single 2024 or 2025 financing in the report.

A market standard is a norm rather than a rule. A term sheet can still arrive with full ratchet or a narrow-based formula in it, and either is a departure that the founders are entitled to ask about and to price.

What to negotiate

Venture Deals’ advice is not to try to remove the clause, which is almost always part of a financing, but to limit its effect. Four points do most of that work. The formula should be broad-based weighted average, with A defined to include preferred shares as converted and options as exercised. The carve-outs should be the customary list, with an employee carve-out that covers the plan as approved from time to time and a carve-out for conversions of existing convertible securities. The waiver should sit with a majority of the series, not with every holder. And the clause should be modelled before signing, by running the cap table through the down round the company would actually accept with the clause as drafted, because the terms of the first priced round are the starting point for the next one and later investors ask for at least what the last ones received.

Questions founders ask

What is the difference between weighted average and full ratchet anti-dilution?

Full ratchet resets the investor’s conversion price to the price of any later issuance below it, whatever the size of the issuance. Weighted average lowers the conversion price in proportion to the money raised at the lower price. In the example, the same $500,000 round leaves the founders at 75.0 per cent under full ratchet and 81.5 per cent under weighted average.

Does anti-dilution give the investor more preferred shares?

No. The investor keeps the same preferred shares. The adjustment lowers the conversion price, so those shares convert into more common shares. Ownership is measured as converted.

What does broad-based mean?

The share count in the formula includes every share on a fully diluted basis: common shares, preferred shares as converted, and options, warrants and other convertible securities as exercised. A narrow-based formula leaves the options and convertibles out, which lowers the price further.

How common is full ratchet in Canada?

Osler’s Deal Points Report found broad-based weighted average anti-dilution in every financing it covered in 2024 and 2025 and in 99 per cent in 2023. Full ratchet did not appear in a single 2024 or 2025 financing in the report.

Next in this series: Control Terms Founders Ignore Until It’s Too Late

Related: Anti-Dilution: What Protection Really Means · Down Rounds in Practice · Participating vs Non-Participating Preferred

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Published 29 December 2025 · Updated 15 September 2026 · Khaled El Fauri