My Next Round Came in at a Lower Valuation. How Much Equity Am I About to Lose?
Nobody raises expecting a down round.
But valuations reset. Runway runs short. And the term sheet that arrives looks very different from the last one. Inside it, in many cases, is an anti-dilution provision that can significantly affect how equity is redistributed, often before founders fully understand the impact.
What Anti-Dilution Provisions Do to Founder Equity
They Protect Investors, Not You
An anti-dilution provision is a clause that adjusts the conversion price of an investor’s preferred shares when a company raises new capital at a lower valuation than the prior round, commonly referred to as a down round. The adjustment gives existing investors more shares to compensate for the reduced price. Those additional shares dilute existing holders, including founders.
Full Ratchet Is the Most Aggressive Outcome
Full ratchet anti-dilution reprices an investor’s entire position down to the new, lower round price. The mechanics are direct:
- prior round price: $10 per share
- new down round price: $4 per share
- result: investor’s conversion price drops to $4, triggering significantly more shares
- founder ownership percentage is reduced accordingly
It is the most investor favouring anti-dilution structure commonly used.
Weighted Average Is Standard but Still Dilutive
Most term sheets use weighted average anti-dilution, which is generally less dilutive than full ratchet. The key difference:
- full ratchet: the investor’s entire position is repriced to the new lower price
- weighted average: a blended conversion price is calculated based on both the prior and new round pricing
The result is less severe, but founder dilution is still real and can be meaningful depending on the size of the down round.
The Formula Matters: Broad Versus Narrow Base
Weighted average anti-dilution comes in two forms:
- Broad-based: includes all outstanding shares in the formula, which reduces the dilution impact on founders
- Narrow-based: uses a smaller share count, which benefits investors more
Push for broad-based. Many Series A investors will accept it without significant pushback.
3 Mistakes Founders Make Here
Mistake #1: Assuming a Down Round Will Not Happen to Them
Most founders treat anti-dilution provisions as protective boilerplate for a scenario they will never face. Three conditions made down rounds more common in 2025:
- seed dilution averaged around 19% across the funding landscape
- tariff uncertainty reduced investor confidence in forward projections
- a more selective funding environment pushed more companies toward bridge rounds and flat raises
Model this clause early, not when capital becomes urgent.
Mistake #2: Accepting Full Ratchet Without Understanding the Alternative
Full ratchet anti-dilution is aggressive and heavily investor-favoring. It is not the market standard. Founders accept it anyway for predictable reasons:
- the term sheet presents it as standard language
- no counsel flags it as an outlier
- founders assume that what appears standard in the document reflects market norms
Weighted average is the standard. Full ratchet is the exception.
Mistake #3: Ignoring What Gets Included in the Anti-Dilution Calculation
The definition of “outstanding shares” used in the weighted average formula determines how much protection investors get. Founders should understand whether the employee option pool is included in the calculation and aim for the broadest possible base to reduce dilution impact. This detail is rarely flagged. It matters.
Before You Sign, Work Through This
Before you agree to anti-dilution terms in any round, work through this:
☐ Does this term sheet use full ratchet or weighted average anti-dilution, and do I know the difference?
☐ If weighted average, is it broad-based or narrow-based?
☐ Have I modeled what my ownership percentage becomes if the next round closes at a 30% lower valuation?
☐ Does the anti-dilution calculation include the option pool, and have I negotiated whether it should?
☐ Has startup-specialized counsel reviewed these provisions before I respond to this term sheet?
If you cannot answer yes to all of these, you are not ready to agree to these terms yet.
Bottom Line
Anti-dilution provisions are written to protect the investor’s position. That is reasonable. The specific mechanism, the formula, and the scope are all negotiable. Founders who understand the difference between broad-based weighted average and full ratchet before they sign are in a meaningfully different position than those who discover it later.
Want to Understand What Your Term Sheet Is Actually Saying?
The First Time Founders Master Class covers anti-dilution provisions, and the term sheet mechanics that determine your real ownership at every stage. Our next free session is May 19th.
Reserve your seat: https://howtoraisevcround.com/how-to-raise-priced-round-2
Sources Used
- Allied Venture Partners, Founder Equity: Down Round Dilution, https://www.allied.vc/guides/down-round-dilution-founder-equity-solutions
- Ledgy, Anti-Dilution Provisions Guide for Startup Founders, https://ledgy.com/blog/anti-dilution-provisions
- The Startup Law Blog, Anti-Dilution Provisions Explained: Full Ratchet vs. Weighted Average, https://www.thestartuplawblog.com/blog/anti-dilution-provisions-startup-guide/
- Verified Metrics, Anti-Dilution Clauses: What You Need to Know Before the Next Round, https://www.verifiedmetrics.com/blog/anti-dilution-clauses