Anti-dilution

Anti-dilution is a protective clause in a shareholder agreement that shields an investor from the full economic impact of a down-round — a fundraising round priced below the investor's original entry price. It works by either issuing the investor additional shares or reducing the conversion price of their preference shares so they end up owning a larger percentage than their original investment implied.

The two main types: Full ratchet is the harshest — the investor's price resets to the new (lower) round price, regardless of how small the down-round is. Weighted average (the market norm) is more balanced — it blends the old price with the new price, weighted by the number of shares issued, producing a middle-ground conversion price. Weighted average is further split into broad-based (includes all dilutive securities in the denominator) and narrow-based (counts fewer share classes), with broad-based being friendlier to founders.

Why founders should care: Full-ratchet anti-dilution can be catastrophically dilutive. If a company raised at ₹100 per share and a small bridge round is priced at ₹50, full ratchet doubles the investor's share count overnight, potentially wiping out substantial founder ownership before any meaningful new capital has arrived. Broad-based weighted average is the standard founders should push for.

Indian context: Anti-dilution rights are standard in Indian term sheets from institutional VCs and are governed by the shareholders' agreement. SEBI's angel fund regulations and DPIIT rules do not mandate specific anti-dilution structures, so the negotiated contract controls entirely.