Broad-Based Weighted-Average Anti-Dilution Protection

Broad-based weighted-average anti-dilution protection is a type of antidilution protection provision for preferred stockholders that is found in the certificate of incorporation of many venture-backed companies. This protection is triggered in the event of a “down round” of series financing, and results in outstanding shares of preferred stock being convertible into additional shares of common stock as compared to the number of shares of common stock into which they were convertible prior to the down round. Unlike a full ratchet anti-dilution protection provision, the size of the adjustment depends on the number of shares sold relative to the company’s existing stock as well as the difference in the price. In other words, under a broad-based weighted-average anti-dilution protection provision, a down round in which $1 million worth of shares are sold will result in a significantly smaller increase in the conversion rate of the preferred stock than a down round at the same price in which $10 million worth of shares are sold.