Anti-dilution Protection
Also known as: Anti-dilution, Down Round Protection, Full Ratchet, Weighted Average, Price Protection, Sulandırmaya Karşı Koruma
Author Ali Gül
In short
A provision protecting an investor's stake or economic value through additional shares or an adjustment if the company issues new shares at a price lower than the investor paid.
Anti-dilution protection protects an investor if the company later issues shares at a lower price than the investor paid (a “down round”). It works by adjusting the investor’s share price downwards to reflect the new price and issuing additional shares accordingly.
Methods
- Full ratchet: The investor’s share price is reduced to the lower price in the new round, regardless of how small the round is; it is the harshest method for founders.
- Weighted average: The new price is the average of the old price and the new round price, weighted by the number of shares issued. In the broad-based method, all fully diluted shares are included, so the effect is more limited; this is the most common method in practice.
Exceptions
Not every new issue should trigger the protection. Agreements usually exclude:
- Shares issued to employees under an employee stock option plan,
- Conversion of a SAFE or convertible note,
- Bonus issues and share splits,
- Strategic transactions approved by investors.
Application under Turkish Law
Under the Turkish Commercial Code, shares cannot be issued below par value (TCC Art. 347). The investor’s share price therefore cannot simply be reduced retrospectively. In practice, protection is achieved by:
- Issuing new shares to the investor at par value for the calculated difference; this requires a capital increase and restriction of the other shareholders’ pre-emptive rights,
- Founders transferring shares from their own holdings to the investor free of charge or at par value,
- Setting out the calculation and undertakings in detail in the shareholders’ agreement, supported by a contractual penalty.
The protection should not be confused with the investor’s right to participate pro rata in new rounds (the pre-emptive right). The pre-emptive right protects the percentage stake; anti-dilution protection protects the economic value of the price paid.
Frequently Asked Questions
Does anti-dilution protection mean the investor's stake can never fall?
No. If the company issues new shares at a price higher than the investor paid, the investor's stake falls and the protection does not apply. It only kicks in on a "down round", where new shares are issued at a lower price. The right to participate in new rounds to maintain the stake is regulated separately.
Which method is better for founders?
The broad-based weighted average method is more balanced for founders because it calculates the effect according to the size of the new round. The full ratchet method reduces the investor's share price to the new price even in a small down round and heavily dilutes founders.
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