when the number of shares outstanding increases each existing stockholder owns a smaller or diluted percentage of the company making each share less valuable 
sometimes the company receives enough cash in exchange for the shares that the increase in the value of the shares offsets the effects of dilution but often this is not the case anti dilution provisions at workdilution can be particularly vexing to preferred shareholders of venture capital deals whose stock ownership may become diluted when later issues of the same stock hit the market at a cheaper price anti dilution provisions can discourage this from happening by tweaking the conversion price between convertible securities such as corporate bonds or preferred shares and common stocks in this way anti dilution clauses can keep an investor s original ownership percentage intact the two common types of anti dilution clauses are known as full ratchet and weighted average with a full ratchet provision the conversion price of the existing preferred shares is adjusted downward to the price at which new shares are issued in later rounds very simply if the original conversion price was 5 and in a later round the conversion price is 2 50 the investor s original conversion price would adjust to 2 50 the weighted average provision uses the following formula to determine new conversion prices 