What is Anti-Dilution Protection?
Anti-Dilution Protection shields investors from the dilution of their shares in future financing rounds at lower valuations. These clauses are common in startup investments, especially when the valuation seems too high.
Full Ratchet: Strong Protection for Investors
The Full Ratchet method adjusts the investor's share as if they had also invested at the lower price of the down round.
The number of new shares for the protected investor is determined by dividing the (i) original investment by the price of the down round ("deemed price").
Weighted Average: Balanced Protection
Broad Based Weighted Average (Founder-Friendly)
This method considers all issued shares of the company (fully diluted) when calculating the "deemed price."
The "deemed price" is determined by dividing the (i) sum of the down round investment + the product of all issued shares and the price of the original investment round by (ii) the total number of all shares (fully diluted and including the down round).
Narrow Based Weighted Average (Balanced Middle Ground)
This method focuses on the shares of the current investment round and does not consider all shares, unlike the Broad Based Weighted Average method.
The "deemed price" is determined by dividing the (i) sum of the down round investment and the product of the affected investor's shares and the price of the original investment round by (ii) the shares of the protected investor and the down round.
Conclusion
Full Ratchet offers maximum protection for investors. Weighted Average provides a balanced approach that considers both past and present. In Switzerland, in my experience, the founder-friendly Broad Based method is predominant. What are your experiences?
