This article is for Irish startup founders who are negotiating investment terms and need to understand anti-dilution provisions before signing a term sheet.
If you're confused about what "weighted average" and "full ratchet" actually mean, or worried about how much ownership you could lose in a down round, this guide explains how each type of anti-dilution works, shows real calculations with specific examples, and tells you which terms to negotiate for.
Key Takeaways
• Negotiate for broad-based weighted average anti-dilution instead of full ratchet, which can dilute founders three times more severely. • Full ratchet provisions reset investor prices to match any down round, regardless of size, potentially devastating founder ownership. • Anti-dilution provisions don't typically apply to employee options, acquisitions, or debt conversions if properly carved out in agreements. • Aggressive anti-dilution terms make future fundraising difficult when founders own less than 20-30% of the company. • Pay-to-play provisions can eliminate anti-dilution protection for investors who refuse to participate in subsequent funding rounds.
Laura Ryan is a practising Barrister at the Bar of Ireland. She graduated from the Honourable Society of King’s Inns in 2024, having previously qualified and practised as a Chartered Accountant in a big four accounting firm.
What exactly are anti-dilution provisions and why do investors want them?
Anti-dilution provisions adjust the conversion price of investor preference shares if you later raise money at a lower valuation, protecting investors from losing value when your company's valuation drops. Without this protection, investors who paid €10 per share would see their investment diluted if you later sell shares at €5, so the provisions compensate them by effectively reducing their original purchase price.
What's the difference between weighted average and full ratchet anti-dilution?
Weighted average considers both the price and size of the down round when calculating adjustments, making it less punitive to founders, while full ratchet resets the investor's conversion price to match the down round price regardless of how much money was raised. For example, if you raise just €200,000 at a lower price, weighted average creates a modest adjustment while full ratchet can massively dilute founders as if the entire company repriced.
How much ownership could I lose under each type of anti-dilution provision?
Using a real example where you raise €200,000 at €2.50 per share after investors paid €5.00: with no anti-dilution you'd lose about 6% ownership, with broad-based weighted average you'd lose 6.46%, but with full ratchet you'd lose 17.5% ownership. Full ratchet can cause nearly three times more dilution than weighted average, even for a small down round.
What's the difference between broad-based and narrow-based weighted average?
Broad-based weighted average includes all outstanding shares and options in the calculation, making it more founder-friendly because a larger denominator means smaller adjustments. Narrow-based only counts issued shares, excluding options and convertible securities, which creates larger adjustments and is more investor-friendly. Most Irish investors accept broad-based weighted average as the market standard.
Do anti-dilution provisions apply to all share issuances?
No, anti-dilution typically only applies when you issue shares at a price below the investor's original price, and most provisions exclude employee share options under approved schemes, share splits, shares issued in acquisitions, and shares issued to banks as part of debt arrangements. Common carve-outs also include option pool shares created at the time of the original investment and shares issued to strategic partners in commercial transactions.
What happens if an investor refuses to participate in a down round?
Some agreements include pay-to-play provisions that reduce or eliminate anti-dilution protection for investors who don't participate in subsequent rounds, encouraging them to support the company in difficult times. If an investor refuses to participate in a down round, they might lose their anti-dilution rights or have their preference shares converted to ordinary shares.
Can I negotiate for anti-dilution protection to expire after a certain period?
Yes, you can negotiate sunset clauses where anti-dilution protection expires after a certain period or successful milestone, such as two years or upon reaching profitability. This recognizes that down rounds often happen early when companies struggle to gain traction, and after proving the model, the risk of down rounds decreases.
How do aggressive anti-dilution provisions affect future fundraising?
Aggressive anti-dilution provisions make future fundraising harder because new investors see founders with minimal ownership and little incentive to continue building the company. If founders own less than 20-30% of the company after anti-dilution adjustments, new investors worry they won't be motivated to create value, which can make Series B or C rounds impossible to complete.
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