Brian Nichols is the co-founder of Angel Squad, a community where you’ll learn how to angel invest and get a chance to invest as little as $1k into Hustle Fund's top performing early-stage startups

Most angels get diluted and don't even realize it happened until years later.

You invest at a $5 million valuation. The company raises the next round at $3 million. Your ownership percentage stays the same, but your shares are suddenly worth less because the whole pie got repriced downward. Meanwhile, the new investors negotiated protection so their shares don't get hammered.

You didn't. Because you didn't know you should.

Anti-dilution provisions protect investors when companies raise down rounds. They're standard for VCs but rare for angels. That needs to change.

What Anti-Dilution Actually Does

When a company raises at a lower valuation than the previous round, it's called a down round. It's usually a signal that the business is struggling.

Without anti-dilution protection, your shares get repriced at the lower valuation. If you invested $25,000 at a $10 million post-money valuation (0.25% ownership) and the next round happens at $5 million, your shares are now worth $12,500 instead of $25,000.

With anti-dilution protection, you get issued additional shares to compensate for the down round. The exact mechanics depend on whether it's full ratchet or weighted average, but the concept is the same: you don't get completely screwed by the repricing.

VCs negotiate for this in every term sheet. Angels almost never do.

Full Ratchet vs. Weighted Average: The Founder-Hostile vs. Founder-Friendly Spectrum

Full ratchet is the nuclear option. It's extremely investor-friendly and extremely founder-hostile.

Here's how it works: if you invested at $10 per share and the company raises the next round at $5 per share, your shares get repriced as if you'd invested at $5 per share from the beginning. You get twice as many shares to compensate.

The problem is that all this dilution comes from somewhere: founders and employees. Their ownership gets crushed. Full ratchet anti-dilution is so punitive that it can destroy founder motivation and make it nearly impossible to recruit employees.

Weighted average anti-dilution is more balanced. It takes into account how much money was raised in the down round and adjusts your share count accordingly. If only a small amount was raised at the lower valuation, you get modest protection. If it was a large round, you get more protection.

The math gets complicated fast, but the concept is simple: weighted average doesn't completely hammer founders while still giving investors some protection.

When Angels Should Actually Negotiate This

Most of the time? You shouldn't.

Anti-dilution protection makes sense for large investors writing six-figure checks who have negotiating leverage. If you're writing $5,000 checks as an angel, you have no leverage and asking for anti-dilution will get you laughed out of the deal.

But there are situations where it makes sense:

If the company is raising at an unusually high valuation relative to traction, anti-dilution protection hedges your bet. You're already taking the risk of investing at a stretched valuation. Getting some downside protection isn't unreasonable.

If you're writing a large check ($50,000+) and the founder is pushing for investor-friendly terms anyway, ask for weighted average anti-dilution. It signals you're thinking about downside scenarios.

If you're investing in a competitive deal where multiple investors are bidding, anti-dilution protection can be part of your edge. You're offering the same money but with more downside protection for yourself.

But let's be clear: in most seed and pre-seed rounds, anti-dilution protection isn't on the table for small angels. VCs get it. You don't. That's just how the power dynamic works.

The Founder Perspective: Why This Matters

From the founder's side, anti-dilution provisions are terrifying.

If the business hits rough patches and they need to raise at a lower valuation (which happens more than people admit), anti-dilution clauses can be devastating. Founders and employees get massively diluted to protect investors. That kills morale and makes it nearly impossible to retain your team.

Elizabeth Yin has been transparent about how Hustle Fund thinks about this: the goal is to back founders for the long haul, not extract every possible advantage at their expense. Overly aggressive anti-dilution provisions don't align with that philosophy.

Most founder-friendly investors skip anti-dilution provisions entirely at the seed stage. They'd rather take the dilution hit in a down round than crush founder ownership.

Why Most Down Rounds Happen Anyway

Down rounds aren't always a sign of failure.

Sometimes market conditions shift. Sometimes a company raised at too high a valuation and needs to reset expectations. Sometimes the business is doing fine but investors got more conservative.

What matters more than the down round itself is whether the company is still building something valuable. If they are, taking a short-term valuation hit to get more capital might be the right move.

Anti-dilution protection doesn't change any of that. It just shifts who bears the cost of the repricing.

Practical Negotiation Advice for Angels

If you have the leverage to negotiate anti-dilution protection, here's how to do it:

Ask for weighted average, not full ratchet. Full ratchet will kill the deal and make you look like an asshole. Weighted average is standard for professional investors and much more defensible.

Only ask if you're writing a check that matters. If you're investing $100,000+ in a seed round, you have standing to ask for downside protection. If you're writing $5,000, you don't.

Be prepared to walk away if the answer is no. Asking for anti-dilution and then backing down when the founder says no makes you look weak. If it's important enough to ask for, it's important enough to pass on the deal if you don't get it.

Understand that asking for this signals something about you as an investor. You're saying that you expect downside scenarios and want protection. That's fine, but it's a different vibe than angels who are just betting on the founder no matter what.

When to Skip It Entirely

Most of the time, honestly.

If you're building a diversified portfolio of 20-30 angel investments at small check sizes, anti-dilution protection on any individual deal doesn't move the needle. Your returns are going to come from your winners going up 100x, not from protecting against down rounds on companies that are struggling.

Hustle Fund's approach is to invest in enough companies that portfolio construction does the work of downside protection. Some companies will have down rounds. Some will shut down. And hopefully a few will be so successful that none of the downside matters.

That's a cleaner strategy than trying to negotiate anti-dilution protection on every deal.

The Bigger Picture

Anti-dilution provisions are one tool in a much larger toolkit for protecting your capital.

The more important tools are: investing at reasonable valuations, diversifying your portfolio, understanding liquidation preferences, negotiating for pro rata rights, and picking companies that have a real shot at generating 100x returns.

If you're doing all of that, anti-dilution protection is a nice-to-have, not a must-have.

If you're not doing any of that, anti-dilution protection won't save you from making bad investments.

Want to learn how to build a portfolio that doesn't need aggressive downside protection because you've structured everything correctly from the start? Angel Squad teaches angels how to think about deal terms, portfolio construction, and the real levers that matter for generating returns. Because protecting against down rounds is way less important than investing in companies that only go up.