Anti-dilution provisions are designed to protect investors in case the company has to raise money at a lower valuation in the future (called a "down round"). This can either be because the company didn't hit milestones or because the investors valued the company too high on the first round. They increase the original investor's effective equity stake by reducing the conversion price based on the price of the down round. Here are some tips to keep you from getting hosed through anti-dilution.

Don't Agree to Full Ratchet: "Full ratchet" anti-dilution provisions adjusts the conversion price-per-share to whatever the price-per-share is for the new raise. Full ratchet is pretty rare now, and is really bad for founders, because it can lead to a huge amount of dilution in a down round. It also gives investors an incentive to push the company into a down round- rather than holding out for a better valuation- so the initial investors can increase their investment without putting in any more money.

The size of the down round doesn't matter with full-ratchet anti-dilution, so even if you raise $1, the original investors still get the same effective increase in their equity stake.

No Anti-Dilution is nice if you can get it: This is really company friendly, and basically means that the investors won't increase their ownership at all in a down round. If you can get an investor to agree not to have any anti-dilution protection, more power to you. If you can't, weighted average is usually a good middle ground.

Broad-Based Weighted Average is a good compromise: Weighted-average anti-dilution provisions are basically the mother of all story problems, and are set out in a page of legalese that resembles Sanskrit. The basic idea is that weighted-average takes into account the size of the subsequent raise in adjusting the conversion price for the original investors. This can mean a lot less dilution in a down round.
There are two types "broad based" and "narrow based." Broad based means that, in figuring out how much of an adjustment to make, the size of the new raise is compared to the size of all of the company's outstanding common stock, plus all convertible securities (e.g., options, preferred, or convertible notes). It's better for the company, because it increases the size of the total pool of stock when figuring out how much of an adjustment to make to the conversion price, so leads to a smaller adjustment. "Narrow based" only compares the size of the new raise to the total number of shares of common stock actually outstanding at the time of the raise, and is generally less favorable to founders. Broad based weighted average is becoming the most common type of anti-dilution provision in equity financings.

Exclusions Apply: Anti-Dilution provision will have a number of exclusions - e.g., stock splits or granting options to employees - that don't trigger the adjustment. Ask for the ability of a certain percentage of investors (usually a majority) to waive the adjustment on behalf of all of the investors at the time of the next financing (why wouldn't they agree to have the option to do something in the future?). While it might be hard to get this type of waiver when the down round is on the table-imagine asking investors not to get a ton of new equity for free-if it is going to really harm the company, you might be able to get them to sign off. Also, especially if you're agreeing to full ratchet, you should ask that only raises of a certain size trigger the anti-dilution provision, so that if you take a really small round to fund short-term needs, you won't get a big dilution.