Weighted average anti-dilution in practice

Weighted average anti-dilution is a widely used mechanism designed to balance investor protections with fairness to founders during a down-round. By factoring in the size and price of new share issuances relative to existing capital, this approach adjusts investors’ positions in a more equitable way compared to full ratchet protections.

Below we outline the key formulae behind weighted average anti-dilution. Whether applied via bonus issues or conversion adjustments, these calculations ensure clarity in maintaining economic balance across all stakeholders.

Example one: conversion adjustment mechanism

• Series A investors purchased 1,000,000 shares at £1.00 per share.

• The company issues 1,000,000 new shares at £0.50 per share.

• Immediately before the new issue, the company has 2,500,000 shares in issue on a fully-diluted basis (the 1,000,000 Series A shares together with 1,500,000 founder and option-pool shares).

Using the broad-based weighted average formula:

Where:

• SIP = Starting Price (the issue/conversion price of the original Equity Share, £1.00 in this case)

• QISP = Weighted average equivalent price per Equity Share in respect of the new Equity Shares issued (in this case, £0.50).

• ESC = the number of Equity Shares in issue

• NS = The number of new Equity Shares issued (1,000,000).

In this case:

The conversion price is adjusted to £0.857, increasing the number of ordinary shares the investor receives upon conversion.

Example Two: Bonus Issue Mechanism

In a similar scenario, a bonus issue would adjust the investor’s position as follows:

Using the broad-based weighted average formula:

Where:

• N = The number of Anti-Dilution Shares to be issued to the Exercising Investor

• WA =

• SIP = Starting Price (the issue price of the original shares, £1.00 in this case)

• ESC = the number of Equity Shares in issue

• QISP = Weighted average equivalent price per Equity Share in respect of the new Equity Share issued (in this case, £0.50).

• NS = The number of new Equity Shares issued (1,000,000).

• Z = The number of Series A Shares held by the Exercising Investor immediately prior to issue (1,000,000).

Step 1: Calculate WA

Using the broad-based weighted average formula:

Substituting values:

• ESC = 1,000,000 (Number of Equity Shares before issue)

• SIP = £1.00

• NS = 1,000,000 (New Equity Shares Issued)

• QISP=0.50 (Issue Price of New Equity Shares)

Step 2: Calculate N

Using the formula:

Substitute:

• SIP = £1.00

• WA = £0.857

• Z = 1,000,000

Step 3: Final Ownership

The Series A investors will receive an additional 167,000 shares to preserve their economic position relative to the new valuation and, as a result hold 1,167,000 shares following the bonus issue.

Find out more about anti-dilution protections in this article from our 'Anatomy of a term sheet' series.