Anti-Dilution Protection

In short

A contractual right that protects existing investors from having their ownership percentage and effective price-per-share devalued when a company raises a future round at a lower valuation than a previous round (a "down round"). There are two common mechanisms: "full ratchet," which adjusts the investor's original conversion price down to match the new, lower round price entirely (heavily founder-unfriendly, rare in India), and "weighted average," which adjusts the price based on both the size of the new round and the price difference, diluting the impact more proportionately (the standard in most Indian term sheets). Anti-dilution clauses only trigger in a down round — if every subsequent round is priced at or above the previous one, the protection never activates and has no effect on the cap table.

How It Works

Anti-dilution works by effectively granting the protected investor additional shares (or an adjusted conversion price) to compensate for the value destruction of a down round — without them having to invest any additional capital. Weighted-average anti-dilution, the market-standard formula, factors in both the size of the new round relative to the existing share count and the magnitude of the price drop, so a small down round issued to a small number of new shares has a modest anti-dilution effect, while a large down round has a bigger one. Full-ratchet anti-dilution, by contrast, ignores the size of the new round entirely and simply resets the investor's price to match the new low, which can be severely punitive to founders and other shareholders who end up bearing all the dilution. Anti-dilution protection is one of the clauses most scrutinised by founders' lawyers during term sheet negotiation, alongside liquidation preference.

Application Process

1. Confirm whether the proposed anti-dilution is weighted-average (standard, more founder-friendly) or full-ratchet (rare, aggressive) before signing a term sheet. 2. Model what a hypothetical down round would do to your ownership percentage under the proposed formula. 3. Negotiate a "broad-based" weighted-average formula (which includes the full fully-diluted share count, including options) over a "narrow-based" one, since broad-based dilutes the effect and is less punitive to founders. 4. Understand that anti-dilution only matters if a down round actually happens — it has zero effect if every round prices at or above the previous one.

Real-World Example

A startup raises a Series A at ₹100 per share. Eighteen months later, market conditions worsen and it raises a Series B down round at ₹60 per share. Series A investors with weighted-average anti-dilution get their effective conversion price adjusted downward — say to ₹85 per share, based on the formula — receiving some additional shares to partially offset the down round's impact, while founders and other shareholders absorb a larger share of the resulting dilution than they would have in an up round.

Key Takeaway

Anti-dilution protects investors — not founders — from a down round, by adjusting their effective price per share. Weighted-average is the standard, founder-tolerable version; full-ratchet is rare and much harsher.