Fundraising
Anti-dilution protection in a down round
Compare full-ratchet and broad-based weighted-average conversion-price adjustments with a worked example and explicit capitalization assumptions.
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Protection changes conversion economics
A down round sells shares at a lower price than an earlier financing. Contractual anti-dilution provisions can adjust the conversion price of an existing preferred class. This can increase its as-converted share equivalent and affect the dilution borne by other holders.
It does not mean the protected investor always keeps exactly the same ownership percentage. Cooley’s down-round financing explanation compares full-ratchet and broad-based weighted-average mechanisms.
Compare two explicit calculations
Assume an old conversion price of $2, a defined pre-round capitalization of 10,000,000 shares, and $2,000,000 of new money buying 2,000,000 shares at $1 each. Exclude convertibles, pool increases, prior adjustments, and contractual exceptions.
A full-ratchet adjustment under these assumed terms resets the conversion price to $1. For the illustrative weighted-average formula below, A is pre-round capitalization, B is new money divided by the old conversion price, and C is actual new shares.
B = $2,000,000 ÷ $2 = 1,000,000. The new price is $2 × (10,000,000 + 1,000,000) ÷ (10,000,000 + 2,000,000) = about $1.8333. The exact definition of A is critical.
Translate the price adjustment into a ratio
If the preferred originally converts one-for-one at $2, the illustrative new ratio is original issue price divided by adjusted conversion price. The full-ratchet case yields 2 common-equivalent shares per preferred share; the weighted-average case yields about 1.0909.
These ratios are not final ownership percentages. The denominator also changes when new investors receive shares. Carry the adjustment into the full post-round capitalization before reporting percentages.
Record the actual method and review exclusions
Cap Table supports none, broad-based weighted average, and full ratchet on preferred classes. Review the model’s adjustment alongside the signed terms before closing a financing.
Waivers, excluded issuances, pay-to-play provisions, and custom capitalization definitions can change whether or how a provision applies. They are not inferred from the selected method. Keep the source agreement with the reviewed financing calculation.