Most ECVC lawyers can recite from memory the basic architecture of venture anti-dilution protection. The standard NVCA formulation adjusts downward the conversion price of preferred stock when the company issues additional equity at a lower price, subject to a familiar list of “Exempt Securities.”

In straightforward scenarios where it’s clear what the price of that additional equity is, and that the price is lower than the current conversion price of the preferred, the system works as intended. But in the case of convertible securities with valuation caps, pre-priced adjustments and staged conversions, the interaction between anti-dilution provisions and “exempt” issuances becomes harder to navigate. The result is a set of edge cases where real economic dilution occurs without a clearly acknowledged anti-dilution trigger, or where multiple provisions appear to compete for the same adjustment.

This post focuses on those outliers associated with convertible notes and SAFEs.

The Baseline: What the “Exempt Security” Carveout is Supposed to Do

Under the model NVCA certificate of incorporation, issuances of “Exempt Securities” are excluded from the anti-dilution adjustment calculus. The policy rationale is that certain issuances such as employee equity, strategic partnership equity and shares issued upon conversion of convertible securities, are not meant to reprice the preferred because they’re not understood to reflect an admission by the issuer of the true value of the company.

That last category (conversion shares) reflects the fact that the economic terms of the convertible instrument (discount, cap, etc.) are negotiated at issuance, and the eventual conversion is simply the mechanical implementation of those terms. If that assumption holds, excluding conversion shares from anti-dilution should not be controversial.

The difficulty arises when the economics are not fully determined at issuance, or when they are determined in more than one step.

At-Issuance Pricing vs. Conversion Pricing: A Mismatch in Timing

Consider a convertible note that includes both a valuation cap which effectively sets a maximum conversion price, and an anti-dilution adjustment at issuance, based on that cap.

At the time a convertible note is issued, one might argue that the valuation cap establishes a “deemed issuance price,” which if lower than the prevailing conversion price of the preferred would trigger an anti-dilution adjustment to the preferred. But the actual conversion does not occur until a later financing, at which point the price may be lower than the capped price implied at issuance (because the round is priced below the cap).

This raises a non-trivial question: has the dilutive event already been accounted for, or does the actual conversion introduce a second, incremental dilution?

The answer in many NVCA-style charters is apparently “no second adjustment,” because the conversion shares themselves are Exempt Securities. But that result can obscure the economic reality that the initial adjustment was based on an estimate (the valuation cap), while the ultimate conversion price reflects an often lower number.

The “Double Count” vs. “Missed Adjustment” Problem

These scenarios generally fall into one of two competing concerns.

The first is a concern over double counting. If anti-dilution is triggered both at issuance of the convertible security (based on the cap) and again at conversion (based on the actual conversion price), the preferred arguably receives a windfall, effectively being protected twice for the same economic dilution.

The second is a concern over missed adjustment. If anti-dilution is triggered only at issuance, and the conversion ultimately occurs at a lower price, the preferred may be under-protected relative to what would have been the result if the actual conversion price had been used from the outset.

The NVCA approach of treating conversion shares as Exempt Securities resolves this tension by prioritizing administrative practicality over precision. It draws a bright line: the relevant moment is the issuance of the convertible security, not its eventual conversion.

But that line is only clean when the economics are fully set at issuance. When they are not, the simplicity could lead to distortion.

MFN Clauses as a Complicating Layer

Most favored nation clauses add another source of tension. An MFN provision typically entitles the holder of a convertible instrument to adopt more favorable terms included in subsequent debt issuances.

In practice, this can lead to a midstream restructuring of the note’s economics after the original issuance date, such as adjustment of the discount, adding a cap or modifying other key terms.

From an anti-dilution perspective, this raises at least two questions. Does the MFN-driven change constitute a new “issuance” for purposes of anti-dilution analysis? And if not, should the original anti-dilution adjustment (if any) be recomputed to reflect the updated economics?

The NVCA COI is either silent or at best ambiguous on these points. The result is that economics can shift without a corresponding recalibration of the anti-dilution framework.

SAFEs and the Illusion of Simplicity

Y Combinator-style SAFEs are often viewed as cleaner instruments, in part because they lack traditional debt features and are more explicitly equity-linked. But they are not immune to the same structural anti-dilution issues.

Where a SAFE converts based on the lower of a valuation cap or a discount to the priced round, the final conversion price is inherently contingent. Treating the resulting shares as Exempt Securities assumes that this contingency is already “priced in” at issuance. That assumption is practically correct but not always exact, particularly in volatile valuation environments.

Again, the framework generally holds, but edge cases can produce outcomes that feel disconnected from the underlying anti-dilution intent.

The concept of “Exempt Securities” is meant to simplify anti-dilution analysis by carving out issuances that do not justify repricing the preferred. In most cases, they succeed.

But when applied to convertible instruments with staged or contingent economics, that simplification can become an approximation. For routine deals, the approximation is good enough. In more complex capital structures, it is worth asking a harder question: are we preserving the intended economics, or just the appearance of them?