Anti-Dilution

Anti-Dilution is a contractual provision in a shareholder agreement that protects an investor's economic position if a startup raises a subsequent funding round at a lower price per share than the investor originally paid — a "down round." When new shares are issued at a lower price, the anti-dilution clause adjusts the investor's conversion ratio (the rate at which their preference shares convert to ordinary equity) upward, so the investor receives more equity shares at conversion than originally agreed. This adjustment partially or fully compensates the investor for the lower new-round price, and in turn dilutes founders and other ordinary shareholders.

Who it applies to

• Investors who hold CCPS or other preference shares with anti-dilution rights — triggered only in a down round
• Founders evaluating the economics of a down round before signing a new term sheet
• Startups comparing term sheets where anti-dilution mechanisms differ

The two mechanisms

Weighted average anti-dilution (market standard in India):

The conversion price is adjusted using a weighted average formula that accounts for both the new round price and the number of new shares issued:

New conversion price = (Old conversion price × Old shares + New capital raised) ÷ (Old shares + New shares issued)

The more shares issued at the lower price, the larger the adjustment to the conversion ratio. A small bridge round at a lower price triggers a modest adjustment; a large Series B at a lower price triggers a larger one.

Full ratchet anti-dilution (rare; avoid):

The conversion price is reset to equal the new (lower) round price, regardless of the size of the down round. Any shares issued at a lower price — even a single share — triggers the full adjustment. The investor converts as if they had originally paid the lower price, receiving significantly more equity.

What most founders miss

Anti-dilution adjusts conversion ratio, not cash. The investor receives no cash under anti-dilution — the adjustment means they receive more equity shares when their CCPS converts. The economic consequence is felt most acutely at the conversion event: a priced round above the cap, an IPO, or an M&A transaction.

A small down round can trigger a disproportionate full ratchet adjustment. Under weighted average, the adjustment is proportional to the down round's size — a ₹50 lakh bridge at a lower price has a modest effect. Under full ratchet, the same ₹50 lakh bridge triggers the full price reset regardless. The mechanism matters enormously for the severity of the outcome.

Anti-dilution and the liquidation preference stack interact. In a down round, anti-dilution adjusts the investor's conversion ratio upward. Combined with an existing preference stack and a modest subsequent exit, the interaction can reduce founder proceeds sharply. Always model both mechanisms together — the anti-dilution effect at conversion and the preference waterfall at exit — when evaluating a down round term sheet.

Exclusion carve-outs protect employee option pools. Most anti-dilution clauses include carve-outs for shares issued under an approved ESOP plan — ESOP issuances do not trigger anti-dilution even if they are technically priced below a prior round's price. Confirm that the ESOP carve-out is clearly specified in the shareholder agreement.

See also

• CCPS (Compulsorily Convertible Preference Shares) — the share class that typically carries anti-dilution rights in Indian VC rounds
• Liquidation Preference — the companion investor protection; both anti-dilution and preference interact in down round and exit scenarios
• Term Sheet — anti-dilution mechanism (weighted average vs. full ratchet) is one of the key terms negotiated at term sheet stage
• Section 79 — down rounds and new share issuances in a down round can affect the 51% ownership change test for loss carryforward