Anti-dilution protection is a right, usually held by preferred shareholders, that adjusts their effective purchase price if the company later raises a round at a lower valuation, softening the impact of a down round on their ownership stake.
The most common version, a broad-based weighted average adjustment, recalculates the investor's conversion price using a formula that accounts for both the size of the new round and how much lower the new price is, a relatively founder-friendly approach. A full ratchet adjustment, which resets the investor's price all the way down to the new round's price regardless of size, is far more aggressive and much less common outside of distressed deals.
The mechanism only matters when a down round actually happens, but its presence in a term sheet is worth understanding at the time the money is raised, since it directly determines how much of the pain of a future down round lands on common shareholders instead of the investors holding the protection.
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