A single formula decides how a down round dilutes founders

The record

When a company raises a later round at a lower price per share than an earlier round paid, those earlier investors can be protected from dilution by an anti-dilution clause in the certificate of incorporation. NVCA's model Certificate of Incorporation includes an optional section for “a broad-based weighted average anti-dilution provision,” triggered when the company issues new shares “for a consideration per share less than the Conversion Price... in effect immediately prior to such issuance.” When triggered, the preferred stock's Conversion Price is reduced according to a stated formula, not by negotiation after the fact.

What the sources establish

The model charter gives the formula in full: “CP2 = CP1* (A + B) / (A + C),” where CP1 and CP2 are the conversion price before and after the down round, A is shares outstanding before the new issuance, B is the shares the new money would have bought at the old price, and C is the shares actually issued. Cooley GO's glossary confirms this is “found in the certificate of incorporation of many venture-backed companies” and explains the adjustment depends on both the price drop and how much new stock is sold, not price alone. Cooley GO separately defines full ratchet protection, the harsher alternative, as resetting old investors' conversion price to the new, lower share price outright, “focusing solely on per-share pricing rather than total financing amounts raised,” and states full ratchet is “notably uncommon in US venture capital transactions” compared with weighted average.

Scope and revision

The anti-dilution section is optional, included only “if the term sheet calls for” it, and the formula's inputs, A, B and C, are defined by cross-referenced sections of the same document, so reading the formula alone will not reproduce the correct adjustment. Neither source states how frequently deals include this protection or choose broad-based over narrow-based weighted average, a less common variant; that needs a separate dataset. These sources are retrieved 16 September 2026 and describe mechanics, not any specific company's down round.

The decision in front of you

A founder facing a down round should ask counsel to run the actual CP2 figure using real share counts, rather than relying on the general claim that weighted average is friendlier than full ratchet, since round size relative to existing shares changes the outcome even within the weighted-average formula. This is an editorial reading beyond the documents: a down round with modest new-share issuance produces a smaller price reset than a large issuance at the same lower price, and that distinction is the formula's whole content.

• Does the charter include a weighted-average clause, a full-ratchet clause, or neither?
• If weighted-average, is it the broad-based or narrow-based version, and how does that change what counts in the formula's denominator?
• What does the actual CP2 come out to, using the company's real pre- and post-issuance share counts?

Anti-dilution protection is not a single concept with one strength; it is a formula whose harshness depends on which variant a charter uses and how large the triggering round turns out to be, and only the document's own definitions settle that question.