Weighted average anti-dilution is defined as a price adjustment mechanism that recalculates an investor’s preferred stock conversion price when a company issues shares at a price below the investor’s original purchase price. Unlike full ratchet, the adjustment is proportional to the size and price of the new issuance.
The Formula
The weighted average conversion price is calculated as:
NCP = OCP x (OS + NM / OCP) / (OS + NS)
Where:
- NCP = New conversion price
- OCP = Old conversion price
- OS = Outstanding shares before the new round
- NM = New money raised
- NS = New shares issued
The formula produces a blended conversion price that falls between the old price and the new lower price. The larger the down round relative to the existing share base, the more the conversion price drops. A small down round barely moves the needle.
Broad-Based vs. Narrow-Based
The critical variable is how you define “outstanding shares” in the formula:
Broad-based counts everything on a fully diluted basis: all common stock, all preferred (on an as-converted basis), all options and warrants (whether vested or not), and any other convertible instruments. This produces a larger denominator, which means a smaller price adjustment and less dilution to founders.
Narrow-based counts only outstanding preferred shares, or sometimes only common plus preferred, excluding the option pool. The smaller denominator creates a larger adjustment, closer to a full ratchet outcome.
Broad-based weighted average is the industry standard. The NVCA model documents use it as the default, and the vast majority of institutional venture rounds adopt it. Narrow-based appears occasionally in investor-favorable deals but is generally viewed as aggressive.
Practical Example
A Series A investor purchases shares at $10 each. The company has 10 million shares outstanding on a fully diluted basis. Later, the company raises a Series B selling 2 million shares at $5 each.
Using the broad-based formula:
NCP = $10 x (10M + $10M / $10) / (10M + 2M) = $10 x (11M / 12M) = $9.17
The Series A conversion price drops from $10.00 to $9.17, a moderate adjustment that reflects the relatively small size of the down round. Under full ratchet, the price would drop all the way to $5.00.
Why This Matters for Fund Managers
When evaluating a venture investment, the anti-dilution provision directly affects your downside economics. Broad-based weighted average is reasonable protection that acknowledges reality: if the company’s valuation drops, your effective price adjusts, but not so aggressively that founders lose all motivation.
For limited partners evaluating fund managers, the type of anti-dilution provisions a GP typically negotiates signals their approach to founder relationships. GPs who routinely demand full ratchet may extract better short-term economics but risk damaging the working relationship with management teams.
Carve-Outs
Standard carve-outs exclude certain issuances from triggering the anti-dilution adjustment: shares issued under the employee option pool, shares issued in acquisitions, shares issued to strategic partners, and shares issued upon conversion of convertible notes or SAFEs. These exceptions prevent routine corporate actions from inadvertently repricing earlier rounds.
Frequently Asked Questions
What is the difference between broad-based and narrow-based weighted average?
Broad-based weighted average includes all outstanding shares on a fully diluted basis (common, preferred, options, warrants) in the denominator. Narrow-based uses only outstanding preferred shares or only outstanding common plus preferred. Broad-based produces a smaller adjustment and is more founder-friendly. It is the industry standard.
Why is weighted average preferred over full ratchet?
Weighted average accounts for the size of the down round relative to existing capitalization, producing a proportional adjustment. Full ratchet ignores round size entirely and resets to the new price. Weighted average is fairer to founders because a small down round creates only a small adjustment, while full ratchet would create a maximum adjustment regardless.
How is the weighted average conversion price calculated?
The formula is: New Conversion Price = Old Price x (Old Shares + New Money / Old Price) / (Old Shares + New Shares Issued). 'Old Shares' is the total shares outstanding before the round. The result is a blended price between the old conversion price and the new lower price, weighted by the number of shares involved.
