What anti-dilution means
Anti-dilution addresses what happens when a company raises money at a lower price than a previous round.
That is called a down round, and it is a real risk for any company. An investor who paid a high price in one round, and then watches new investors buy the same shares more cheaply, has lost value through no fault of their own.
Anti-dilution provisions adjust the earlier investor's position so that the loss is shared rather than borne entirely by them.
The adjustment usually operates by changing the rate at which the investor's preference shares convert into ordinary shares, effectively giving them more shares for the same money.
It is important to separate two ideas that share a word. Anti-dilution here means price protection against a down round. Pre-emption rights, sometimes loosely called anti-dilution, are a different thing: the right to participate in a new issue to maintain your percentage.
How it is used
There are two mechanisms and the difference between them is large.
Full ratchet. The earlier investor's conversion price is reduced to the new, lower price, as though they had invested at the down round price all along. It is the harshest form, and it transfers a great deal of value from founders and other shareholders regardless of how few shares the down round issued.
Weighted average. The conversion price is adjusted by reference to both the new price and the number of new shares issued, so a small down round produces a small adjustment and a large one produces a bigger adjustment. It is proportionate and it is the market standard.
Weighted average comes in two forms, broad based and narrow based, differing in what counts as outstanding shares in the calculation. Broad based is more favourable to founders.
Carve outs matter too. Standard provisions exclude certain issues from triggering the adjustment: shares issued under an employee share scheme, on conversion of existing convertibles, in an acquisition, or to lenders and strategic partners with board approval.
Without those carve outs, ordinary corporate activity triggers an adjustment nobody intended.
Key features
- Protects an investor if a later round is priced lower
- Operates by adjusting the conversion rate of preference shares
- Full ratchet reprices to the new round price entirely
- Weighted average adjusts proportionately and is the market standard
- Broad based weighted average is more favourable to founders
- Carve outs prevent ordinary issues from triggering an adjustment
How this works in Nigeria
Down rounds are not theoretical for Nigerian companies. Currency movement, funding cycles and sector corrections all produce them, and a company that raised at an ambitious valuation may need to raise again at a lower one.
That makes the choice of mechanism a real negotiating point rather than boilerplate.
A founder should resist full ratchet. It transfers value disproportionately, and in a company that raises a small bridge at a lower price it can produce an adjustment far larger than the amount raised. Broad based weighted average is the position to hold.
The second Nigerian point is implementation, and it is the same as for liquidation preference. Anti-dilution operates through the terms of a share class, so it must be reflected in the articles and not only in the shareholders agreement. A provision agreed contractually with no corresponding share class does not work as intended when it is invoked.
The third is interaction with convertible instruments. Where a company has notes or SAFEs outstanding with caps, and then does a down round, the conversion of those instruments and the anti-dilution adjustment interact in ways that are difficult to model on the back of an envelope. Build the waterfall properly before agreeing terms.
And the practical point: the best protection against a down round is not a clause. It is raising at a valuation the company can grow into.
Anti-dilution vs pre-emption rights
Two protections against dilution that work completely differently.
Pre-emption rights give an existing shareholder the right to participate in a new issue, buying enough of the new shares to maintain their percentage. It costs money: to avoid dilution you have to invest again. It applies to every issue, whatever the price.
Anti-dilution is price protection. It applies only where the new issue is at a lower price than the investor paid, and it costs the investor nothing. The adjustment gives them additional shares, and the value comes out of the other shareholders.
Most investment documents contain both. Pre-emption maintains percentage on any issue; anti-dilution compensates for a fall in price.
Founders should understand that pre-emption is neutral and reasonable, while anti-dilution transfers value from them, which is why the mechanism matters so much.
Limits and risks
Anti-dilution protects a price, not an outcome. An investor with full protection in a company that fails still receives nothing.
It can also make a down round harder to complete. New investors entering at a lower price find that the adjustment increases the earlier investors' shareholding at their expense, and the round has to be restructured or the protection waived.
That waiver is common in practice, which tells you something about how the protection actually operates.
And complexity is a real cost. Stacked instruments with different caps, preferences and adjustment mechanisms produce cap tables that only a model can explain, which slows every subsequent transaction.
Worth knowing
Resist full ratchet and hold out for broad based weighted average. A small bridge round at a lower price can trigger a full ratchet adjustment worth far more than the money raised, and Nigerian founders sign it because it appears in a term sheet as though it were standard.
Questions people ask
What is anti-dilution protection?
A provision protecting an investor if the company later raises money at a lower price, by adjusting the rate at which their preference shares convert so they receive more shares for the same investment.
What is the difference between full ratchet and weighted average?
Full ratchet reprices the earlier investment entirely to the new lower price, regardless of how few shares were issued. Weighted average adjusts proportionately by reference to both the price and the number of new shares, and is the market standard.
Which should a founder accept?
Broad based weighted average. Full ratchet transfers value disproportionately, and a small bridge round at a lower price can trigger an adjustment worth more than the amount raised.
What are the carve outs?
Issues that do not trigger an adjustment, typically shares under an employee share scheme, conversion of existing convertibles, shares issued in an acquisition, and issues to lenders or strategic partners with board approval.
Is anti-dilution the same as pre-emption?
No. Pre-emption lets you buy into a new issue to keep your percentage, and it costs money. Anti-dilution is price protection that costs the investor nothing and takes value from other shareholders.
Does it need to be in the articles?
Yes. It operates through the terms of a share class, so it should be reflected in the articles as well as the shareholders agreement, or it may not work as intended when invoked.