Anti-dilution protection means that an investor desires compensation for an investment made in the event that in a follow-on round the company’s valuation is lower than in the round in which the investors themselves joined the company. Protection is thus employed to secure against reckless promises of entrepreneurs and excessively high valuation demands.


Shares held by founders 70 (70%) investors 30 (30%)
The subscription price has been (à €10), in which case the company’s premoney is €700.

Two new shareholder join the company and share issue is implemented at 5 shares per shareholder. On account of mechanical hedging, the investor is given additional shares too.
Founders: 70 (61%)
Investors 1: 33 (30%)
New sh one: 5 (4,5%)
New sh two: 5 (4,5%)

The valuation of a company in the first round has been excessively high and the second round is executed with a €400 premoney valuation, additional financing need standing at €100.

In full-ratchet protection, the ownership structure changes with the valuation. An investor obtains a share at the price of €4 instead of €10 (conversion ratio 1:2,5) so that:
Founders: 70 (41%)
Investors 1: 75 (44%)
Investors 2: 25 (15%)

The board-based conversion ratio is only 1:1,55, as the next round is small. The subscription price changes from €10 to €6,47.
Founders: 70 (49%)
Investors 1: 47 (33%)
Investors 2: 25 (18%)

The narrow-based formula works in the same way as the board-based formula.

Mechanical anti-dilution protection refers to a contractual term whereby the company commits to issuing an investor new shares, without additional investments, so that the investor in question retains his or her holding. For example, in such a way that ordinary share stocks for personnel do not decrease the holding of investors.

Price-based anti-dilution protection refers to contractual terms whereby it is agreed to adjust share-specific pricing on the basis of later events. There are three main types of price-based protections:

Full ratchet anti-dilution protection refers to determination of the ownership structure of company retrospectively according to the valuation if it is lower than the current round. A full ratchet condition is harsh for a entrepreneur team if they do not achieve the targets they have promised investors and they are forced (e.g. owing to a cash crisis) to seek new share deposits. When the clause is triggered, the investor gains a larger holding in the company than agreed with the original investment.

Broad-based weighted average anti-dilution protection is similar to the full ratchet mechanism, but here the ownership structure is decided retrospectively using a formula which also takes into account the size of the next round and not just the valuation. Compared to full ratchet protection, this method provides the founder shareholders with better protection against changes in ownership structure. An example of the formula is shown below


Narrow-based weighted average anti-dilution protection works in the same way as the above, but only specified share classes, instead of all share classes, options and convertible bond loans, are used in calculation.

Anti-dilution protection also usually covers exceptional situations, where it is not complied with. These situations are typically

-incentive shares and options issued for key personnel in the company or strategic partners
– equity-linked instruments used in corporate restructuring (purchases with own shares) and in joint ventures.