## DEFINITION of 'Broad-Based Weighted Average'

Broad-based weighted average is an anti-dilution provision used for the benefit of existing preferred shareholders when additional offerings are made by the corporation. The broad-based weighted average accounts for all equity previously issued and currently undergoing issue.

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## BREAKING DOWN 'Broad-Based Weighted Average'

The new weighted average price is adjusted for the preferred shareholder providing for protection against dilution. However, because all equity issued by the company is included in the weighting process, it is not as favorable as other weighting methods.

## How Broad-based Weighted Average is Determined

Calculating the broad-based weighted average uses a formula that takes into account the price per share and amount of money a company previously raised and the amount of money to be raised in a new deal, and the price per share under that deal:

(Common outstanding previously issued + common issuable for the amount raised at the prior conversion price) ÷ (Common outstanding previously issued + common issued in new deal)

For the broad-based weighted average, the representation of common outstanding includes all common and preferred shares on an as converted basis, as well as all outstanding convertible securities, such as options and warrants.

## The importance of Broad-based Weighted Average

The broad-based weighted average often comes into play with successive venture capital financing rounds as more shareholders invest in the company. The intent is to safeguard the ownership stake that was granted to early shareholders as more funding rounds stand to further dilute shares and potentially weaken their interest ownership in the company. This can be a particular issue if the company sees a “down round” where it is devalued and the shares they hold likewise lose value. Dilution may be inevitable as a company grows and gains more shareholders, however the early backers may require anti-dilution provisions when they invest to protect their interests as the company evolves. This can also protect them against intentional dilution that is purposely meant to weaken their ownership positions with the company.

There are variations on this calculation by quantifying common outstanding shares differently. For instance, common outstanding could represent just the preferred and common stock that is outstanding but no convertible securities such as warrants and options, or the common shares issuable upon the exercise of debt.

Yet another approach exists, for narrow-based weighted average, which only accounts for common outstanding preferred shares that are convertible for a specific series or all convertible preferred shares. By using the broad-based formula, the scale of the ant-dilution adjustment is reduced for preferred stock owners as compared with narrow-based weighted average.

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