Anti-Dilution Provision

What happens when a startup's value falls?

Imagine you invest in a Bengaluru startup at ₹100 per share. Two years later, funding markets sour and the company raises a fresh round at ₹60 per share — a down round. Your earlier shares are now worth less, and new investors got a better deal. An anti-dilution provision is the clause that cushions this blow for the earlier investor.

How it actually works

When a down round happens, an anti-dilution clause adjusts the investor's effective conversion price downward, handing them extra shares to compensate. There are two main flavours, and the difference is enormous for founders:

- Full ratchet. The investor's price is reset *all the way* to the new, lower price — as if they had originally paid the down-round price. This is brutally dilutive to founders, even for a tiny new raise. - Weighted average. The adjustment is blended, accounting for how many shares were issued at the lower price. It produces a far gentler reset and is considered founder-friendly.

In Indian VC deals, broad-based weighted average is the market standard, especially from Series A onwards. Full ratchet is rare and usually appears only when an early angel or a strongly-positioned investor has outsized leverage.

The Indian legal wrapper

In India these clauses live in the shareholders' agreement (SHA) and must work within the Companies Act, 2013, and — where foreign money is involved — FEMA pricing rules, which restrict how cheaply shares can be issued to non-residents. For listed entities, SEBI norms also apply. This means an anti-dilution adjustment can't simply be papered in; it has to be structured to comply with pricing regulation.

The practical takeaway

If you're a founder, fight hard to keep anti-dilution at broad-based weighted average and resist full ratchet — it can quietly cost you control in a bad round. If you're an investor, anti-dilution is reasonable downside insurance, but pushing for full ratchet can poison founder relations and the company's future cap table. The fair middle is the Indian norm for good reason.