Anti-dilution provisions are the rate-of-return protection clause. They protect a preferred investor against dilution if the company raises future capital at a lower price. Two structures dominate; the math behind each tells you what to negotiate.
Broad-based weighted average
If a down round happens, the conversion price of the prior round resets to a weighted average of the old and new prices, weighted by share count. The result: the prior investor's effective ownership increases by a moderate amount that scales with the size of the dilutive issuance.
Formula: New CP = Old CP × (A + B) / (A + C). Where A = shares outstanding pre-issuance, B = shares the new money would buy at the old price, C = shares actually issued. The further the new price is below the old price, and the larger the issuance, the more the CP resets.
Full ratchet
If a down round happens, the conversion price resets to the new (lower) price regardless of the size of the issuance. A small dilutive issuance can dramatically reset the prior round's CP. Founders and employees take all the dilution.
Full ratchet is structural-vandalism aggressive in a normal financing. It appears in bridge rounds, distressed scenarios, or where an investor has unusual leverage. Founders should resist it; if they cannot, they should negotiate a sunset (the ratchet expires after a defined period or a defined good-news event).
What's negotiable in practice
Pay-to-play conditions on anti-dilution (only investors who participate in the down round retain their protection); duration of the protection (full term vs. sunset); and what counts as a 'dilutive issuance' (carve-outs for employee options, M&A consideration, equipment financing). Each of these tilts the protection's bite.