Price protection changes conversion rights, not the cash invested.
A weighted-average adjustment lowers the preferred conversion price when an eligible issuance occurs below the current conversion price. It uses both the price difference and the issuance size. Full ratchet instead resets to the lower issuance price regardless of the eligible round size. Neither mechanism guarantees that the protected investor retains its original ownership percentage.
The broad and narrow capitalization bases are entered separately because their contractual definitions matter. They are also separate from the fully diluted denominator used to report ownership. The comparison assumes only this one protected class adjusts, and that the new share count is already fixed. It does not solve a financing whose price or capitalization must change simultaneously.
The formula, made clear.
- A: capitalization basis
- Common equivalents outstanding before the issuance and before this anti-dilution adjustment, under each agreement’s defined inclusions.
- B: equivalent shares at old price
- Eligible new shares × new issue price/current conversion price. Excluded consideration is excluded with its shares.
- Effective additional shares
- Increase in common shares issuable on conversion; the company does not receive additional cash for that adjustment.
- Ownership denominator
- Existing fully diluted shares + all new shares + effective additional protected common equivalents. Excluded issuances still dilute ownership.
Put the numbers in context.
With $10.00 current conversion price, 200,000 new shares at $5.00 and A of 1 million, broad-based weighted conversion price is $9.17. A narrower 800,000 basis produces $9.00, while full ratchet produces $5.00. The comparison uses the same fully diluted ownership denominator before adding each adjustment.
| Input | Example value |
|---|---|
| Protected preferred original issue price | $10.00 |
| Current protected conversion price | $10.00 |
| Protected preferred shares outstanding | 200,000 preferred shares |
| Broad-based pre-issuance capitalization A | 1,000,000 common equivalents |
| Narrow-based pre-issuance capitalization A | 800,000 common equivalents |
| Fully diluted ownership denominator before issuance | 1,000,000 common equivalents |
| New issuance price per common equivalent | $5.00 |
| Total new common equivalents issued | 200,000 shares |
| New shares excluded from the protection trigger | 0 shares |
| Your existing unprotected common shares | 600,000 shares |
| Broad-based weighted conversion price | $9.16667 |
What this calculation assumes
One protected preferred class, one positive-price issuance with fixed common-equivalent count, and a uniform price for eligible shares. Broad and narrow A are explicitly supplied rather than inferred from legal labels. Excluded issuances affect ownership but do not trigger protection. No adjustment when eligible count is zero or issue price is at least current conversion price. No penny rounding, minimum-adjustment thresholds, pay-to-play, waived rights, successive financing iteration, free issuances, stock splits, multi-class interactions, SAFE/note conversion, option-pool top-up or contractual interpretation. Fractional conversion equivalents are retained mathematically.
Methodology references
What to consider next.
Reconcile formula A, exclusions and conversion-price rounding with the governing documents. Interacting preferred classes, converting instruments and financing-price circularity belong in a full cap-table model.
How we approach financial models →