Anti-dilution: full ratchet vs weighted average, with an example

Most founders read the anti-dilution clause once and move on. It’s two lines in a term sheet that do nothing until you raise at a lower price than last time; then they decide who absorbs the drop. Italy adds a twist, spelled out by the notary and law professor Vittorio Occorsio in Forbes Italia this September: the SRL, the legal form of most Italian startups, has no convertible shares and no conversion prices.

This guide covers what anti-dilution protects against, runs full ratchet and weighted average on the same numbers in euros, shows what the market signs and how Italian bylaws do the job with quotas, then what to negotiate. New to term sheets? Start from the beginner’s map, from zero to a first round.

What does an anti-dilution clause protect against?

A down round: a round priced below the one before. Say your Series A fund paid €2.00 a share and the next investor will only pay €1.00. On paper the fund’s stake has just lost half its value, and the clause shifts part of that loss onto the other shareholders. In practice, onto you and your team.

How often does it happen? Cooley counted down rounds in 12.1% of the 166 financings it handled in the second quarter of 2026. Carta’s figure for the first quarter was 11.4%, the lowest in nearly four years. About one round in eight.

In a US-style deal the investor holds preferred shares that convert into common ones, and the clause lowers the conversion price, so each preferred share converts into more common shares. Your term sheet names the formula in a single line; our guide to the term sheet clauses that matter at seed puts it next to the others.

What it doesn’t cover: dilution in the everyday sense, your percentage shrinking as new shares are issued, which happens in every round. Price-based protection ignores an up round completely. Against that, Italian law gives every quota holder the right to subscribe new quotas pro rata (article 2481-bis of the civil code), if they put the money in.

Full ratchet vs weighted average: how each one works

Full ratchet is the blunt version. The investor’s price drops to the new price, full stop. Fenwick’s definition says it applies ‘regardless of how few or how many new shares are sold at the lower price’. One euro raised at a discount is enough to trigger it.

Weighted average looks at how much money comes in at the lower price. The broad-based version, as DLA Piper sets it out, reads CP2 = CP1 × (A + B) ÷ (A + C). CP1 is the conversion price before the down round, CP2 the one after. A is the fully diluted capital before the round, pool options included. B is the money raised divided by CP1: the shares it would have bought at the old price. C is the number of shares actually issued.

Narrow-based uses the same formula with a smaller A: only the shares already issued and outstanding, without options or conversion rights. Smaller A, bigger adjustment, better for the investor. If the share count needs a refresher, here’s what fully diluted means on a term sheet.

Anti-dilution example in euros: one down round, three outcomes

Let’s run the numbers. The company is invented.

Say a software startup in Milan raised its Series A two years ago. One fund put up the whole €2 million, at €2.00 a share, and got 1,000,000 preferred shares. The founders own 3,000,000 shares. Add the 1,000,000 options in the pool and you’re at 5,000,000 fully diluted, which puts the company at €10 million post-money and €8 million pre-money. Growth stalls. Now a new investor offers €1.5 million, but only at €1.00 a share. That’s 1,500,000 new shares.

Broad-based first. A is the 5,000,000 fully diluted shares. B is what €1.5 million would have bought at the old €2.00, so 750,000, and C is the 1,500,000 shares actually issued. Run the formula, €2.00 × 5,750,000 ÷ 6,500,000, and you get a new conversion price of about €1.77. Narrow-based leaves the million pool options out of A and lands at about €1.73. Full ratchet goes straight to €1.00.

	No protection	Broad-based weighted average	Narrow-based weighted average	Full ratchet
New conversion price	€2.00	€1.77	€1.73	€1.00
Shares the fund converts into	1,000,000	1,130,435	1,157,895	2,000,000
Fund’s stake after the round	15.4%	17.0%	17.4%	26.7%
Founders’ stake after the round	46.2%	45.2%	45.1%	40.0%
New investor’s stake	23.1%	22.6%	22.5%	20.0%
Fund’s stake valued at €1.00 a share	€1.0M	€1.13M	€1.16M	€2.0M

Look at the founders’ row. Broad-based costs them about one point, full ratchet more than six. Sell the company for €50 million one day and the gap between the two formulas is worth about 5.2 points of the founders’ stake, roughly €2.6 million, before any liquidation preference is paid ahead of them.

Shrink the down round to €300,000 at the same €1.00 and broad-based barely moves, to €1.94. Full ratchet still drops to €1.00 and still doubles the fund’s shares, from 18.9% to 31.7% of the company. That’s the case against it: a small, desperate round can hand over a large slice of the business.

One thing the table hides: the new investor paid for 23% and won’t happily settle for 20%. Expect it to price its round on the share count after the adjustment, which pushes the founders lower still. The starting arithmetic is in pre-money vs post-money valuation, with a worked example.

Which anti-dilution clause is market standard?

Italy first. Italian Tech Alliance’s Series A term sheet model leaves the choice open, with narrow-based, broad-based and full ratchet in square brackets. Its glossary is less neutral: full ratchet is particularly aggressive and little used, weighted average an acceptable compromise. It also says when to expect the clause at all: from the first capital increase in life sciences, where seed rounds are large (roughly above €1 million), and fairly rarely before a Series A elsewhere.

North American data is blunter. Wilson Sonsini found broad-based weighted average in 100% of the 2025 financings in its data (96% in 2024) and full ratchet in none (1% the year before). Osler’s 2025 Deal Points Report, out in May 2026, found 100% in Canada. Cooley’s glossary calls full ratchet ‘far less common’.

How does anti-dilution work in an Italian SRL?

An SRL has quotas, not shares (article 2468 of the civil code), and quotas don’t convert into anything. So instead of a lower price, the Italian investor gets more of the company when a cheaper round arrives.

The reference is Massima 186 of the Milan notaries’ company law committee, dated 7 January 2020. SpA and SRL bylaws, it holds, can oblige the company to assign a set number of new shares or quotas free of charge to protected investors when a later paid capital increase is priced below a threshold in the clause, even if they don’t subscribe. The condition: what the other subscribers pay in must at least equal the capital increase actually subscribed. In practice the new investor’s share premium pays for the free quotas.

The protected investor is identified by a category of quotas (article 26 of decree-law 179/2012, open to every SRL that qualifies as an SME since 2017) or by a particular right under article 2468, paragraph 3. Occorsio describes the usual set-up: class A quotas for founders, class B for investors, and anti-dilution as a right to keep a percentage, for instance by subscribing part of the new increase at nominal value. In our example, broad-based would take the fund from 15.4% to 17.0% with new quotas.

Where the clause sits matters too. In the bylaws, Occorsio notes, it binds future shareholders as well. In a shareholders’ agreement it binds only the signatories, and a breach gives a right to damages, not the power to undo the capital increase. Our guide to the shareholders’ agreement for a startup covers what goes where.

How to negotiate anti-dilution: carve-outs and pay-to-play

Start with the formula. Asking for broad-based isn’t bold: it’s what almost everyone in the data above signs. If a fund insists on full ratchet, ask what worries it. Sometimes the honest answer is a valuation pushed too high, and a lower price today costs you less than a ratchet later.

Then the carve-outs, the issues of new shares that don’t trigger the clause. Italian Tech Alliance’s model excludes recapitalisations after losses and increases serving an incentive plan for employees, collaborators, directors and shareholders. Holloway’s guide adds shares issued in an acquisition and venture debt. Without carve-outs, even hiring with options could set the clause off.

Pay-to-play is the trade you can offer. The protection then applies only to investors who put in their full pro rata share of the down round; the others lose it, and in the harsher version their preferred shares convert into common ones (Fenwick). Wilson Sonsini found pay-to-play in 42% of its 2025 down rounds at Series B and later, up from 27% in 2024. Cooley counted it in 8.4% of all its deals in the second quarter of 2026.

Last, read the clause next to the liquidation preference and your cap table: both are written for the bad scenario, and they stack. The cap table simulator in our Investor-Ready Kit (€149) shows the dilution scenarios on your own numbers. And if a short bridge round between two priced rounds could spare you the down round, weigh that first.

Checklist: before you sign an anti-dilution clause

1. Find the formula in the term sheet: full ratchet, narrow-based or broad-based. Ask for broad-based.
2. Ask what’s counted in A. You want pool options, warrants and convertibles in there, because a wider base gives a gentler adjustment.
3. Get the carve-outs in writing: the incentive plan and any recapitalisation after losses, plus shares issued in an acquisition and venture debt.
4. If the fund wants strong protection, offer pay-to-play in exchange.
5. Run a down round at half your current price on your cap table, before you sign.
6. In an SRL, agree with your lawyer and notary whether the clause goes in the bylaws or only in the shareholders’ agreement.

This article is general information, not legal or tax advice. How an anti-dilution clause works depends on your bylaws, shareholders’ agreement and term sheet: have a lawyer, and for the bylaws a notary, check the wording before you sign.