Angel Investors Network
    Glossary

    Broad-Based Weighted Average

    A broad-based weighted average is an anti-dilution protection mechanism that adjusts an investor's share price based on a weighted average of all shares outstanding, including common stock. This formula is commonly used in venture financing to protect early-stage investors from significant dilution when subsequent funding rounds occur at lower valuations.

    Broad-Based Weighted Average Definition

    A broad-based weighted average is an anti-dilution provision that recalculates an investor's share price based on a weighted average formula that considers all outstanding shares, including common stock and all classes of preferred stock. When a company issues new shares at a lower price than previous rounds, this mechanism adjusts the conversion price downward to protect investors from excessive dilution.

    Why It Matters for Angel Investors

    Angel investors use broad-based weighted average clauses to safeguard their ownership percentage and investment value. This protection becomes critical when a startup faces a down round—where new funding occurs at a valuation lower than previous rounds. Without anti-dilution protection, early investors would lose significant value as their ownership stake shrinks substantially.

    The broad-based approach is investor-friendly because it includes all shares in the calculation, spreading the dilution impact more evenly across the cap table. This contrasts with narrow-based weighted averages, which only consider preferred shares, offering stronger protection but potentially less favorable terms for the company.

    How It Works

    The formula adjusts the conversion price of preferred shares when new shares issue at a lower price. The calculation incorporates:

    • The original purchase price of preferred shares
    • The number of preferred shares outstanding
    • The new lower issue price
    • The number of new shares being issued
    • All common and preferred shares outstanding

    Example

    An angel investor purchases 100,000 Series A shares at $1.00 per share. Later, the company issues Series B shares at $0.75 per share. Using a broad-based weighted average formula, the investor's conversion price adjusts to a rate between $0.75 and $1.00, protecting them from the full impact of the down round while fairly accounting for all shareholders.

    Learn more about related investment protections: Anti-Dilution Protection, Down Round, Conversion Price, Narrow-Based Weighted Average, and Preferred Stock.