Anti-Dilution Rights Explained: A Beginner’s Guide for Founders

This article was written by Karthik Jayakumar, Partner.

When investors negotiate to put money into a startup, their biggest concern is risk. They are coming in early, often before profits, sometimes even before revenue. One of the core protections they negotiate is something called an anti-dilution right.

For many first-time founders, this concept is confusing because “dilution” already feels like a normal consequence of growth — every new fundraise reduces the founder’s percentage. So what exactly is “anti-dilution”? And why does it only protect investors and not founders?

This article explains anti-dilution rights in a simple way — what they mean, when they apply, why investors want them, and the common forms they take in Indian venture deals.

1. Start With the Basics: What is Dilution?

Every time a company issues new shares — for employees (ESOP), for new investors, or for strategic partners — the ownership percentage of existing shareholders reduces.

Example:

• You have 10,000 shares; you own 100%.

• You issue 5,000 more shares to a new investor.

• Now there are 15,000 shares total, and your ownership drops to 66.6%.

This is normal dilution — it happens in almost every startup journey and is a natural side-effect of raising capital.

2. What is Anti-Dilution?

Anti-dilution is not a mechanism that prevents dilution generally. It does not stop a founder’s percentage from going down, and it does not affect normal fundraises.

Instead, anti-dilution protects investors only if the company raises a future round at a lower valuation than the valuation they originally invested at.

This scenario is called a down-round.

Why Investors Worry About Down-Rounds

Imagine an investor puts in ₹5 crores when your company is valued at ₹25 crores (pre-money). They buy shares at a price of ₹250 per share.

If later - due to slow growth, market issues, or strategic reasons - the company raises a new round at a valuation of just ₹15 crores, the new investor may pay only ₹150 per share.

Without protection, the earlier investor would suffer - because the market is now saying their shares are worth less. Anti-dilution adjusts their share conversion price to compensate them.

3. Why Does Anti-Dilution Apply Mostly to CCPS?

Institutional investors in India typically invest using CCPS (Compulsorily Convertible Preference Shares).

Before conversion into equity, their economic terms - including liquidation preference, voting rights, and anti-dilution - are locked into that instrument.

Equity-holding founders generally do not carry anti-dilution protection because anti-dilution is not meant to make everyone equal - it is an investor-driven risk-mitigation tool.

4. When Does Anti-Dilution Trigger?

It only triggers when all three conditions are met:

Condition	Example
There is a future fundraising event	Series A followed by a subsequent raise
New shares are issued	Company allots new equity/preference shares
New issue price is lower than original	Series B price per share is lower than Series A

If the next round is at a higher or equal valuation, there is no impact.

5. The Types of Anti-Dilution: Explained Simply

There are three common types — each provides a different level of protection to investors.

(A) Full-Ratchet Anti-Dilution

Maximum protection for investors.

Full-ratchet says: If any share is issued later at a lower price, the investor’s price is revised all the way down to that lower price.

Example

Series A:

• Investor buys shares at ₹250 each.

Series B:

• Company issues shares at ₹150.

Under full-ratchet, the Series A investor is treated as if they also invested at ₹150, increasing the number of shares they will convert into.

So if they originally bought 20,000 CCPS at ₹250, for ₹50 lakhs —

At ₹150, their investment should have got 33,333 shares.

They will now receive the difference (13,333 extra shares) on conversion.

Outcome: Founders are heavily diluted.Popularity: Rare in India in mainstream VC deals; more common in aggressive strategic or distressed financing.

(B) Weighted-Average Anti-Dilution

Most common in India - balances fairness.

Here, the investor’s conversion price is adjusted partially, based on:

• The new lower price

• The amount of new capital raised

• The total number of existing shares

Formula (simplified conceptual logic):

Old conversion price is adjusted proportionately to reflect how big the down-round is.

Example

Series A:

• Conversion price = ₹250

Series B:

• New price = ₹150

• Only small capital is raised (say 10% of existing capital)

The revised conversion price might become ₹220 instead of falling all the way to ₹150.

This is less harsh on founders because:

• Investor protection exists

• But founders are not wiped out by issuing huge numbers of extra shares

Outcome: Mild to moderate dilution for founders

Popularity: The standard in most VC term sheets in India

6. Why Should Founders Care?

Anti-dilution does not stop you from continuing your company.

But it can materially change founder ownership when triggered.

Founder Blind Spot

Founders often negotiate valuation aggressively but ignore anti-dilution clauses because they seem hypothetical.

However, down-rounds are very common - especially:

• When growth slows

• When markets turn

• When bridge rounds are raised quickly

• When cap tables are tight

A small misstep in structuring anti-dilution today can mean a significant dilution later — with no negotiation.

7. How Can Founders Negotiate Anti-Dilution?

Founders should focus on how anti-dilution applies — not just whether it exists.

Negotiation checklist:

Question to Ask	Why It Matters
Is the clause full-ratchet or weighted-average?	Big difference in dilution impact
Does anti-dilution apply to all new issues, or only true down-rounds?	Prevent unfair triggers
Are ESOP pool issuances excluded?	Otherwise ESOP expansion can trigger anti-dilution
Is there a pay-to-play condition you can add?	Forces investors to also contribute
Can there be a floor price?	Protection against extreme dilution

Even basic clarifications can avoid painful surprises.

8. Quick Story-Style Illustration

Imagine:

• You own 60% of your startup.

• Investor A holds 20% CCPS at ₹250/share.

• Market slows → you raise a bridge round at ₹150/share from Investor B.

• Anti-dilution applies — Investor A’s CCPS conversion adjusts.

• Investor A’s stake increases to 26% upon conversion.

• Yours drops to 54%.
  

A small term sheet clause today caused a 6% dilution later — without you raising a rupee extra from Investor A.

That is the real-world impact.

9. Conclusion

Anti-dilution rights exist to protect investors from losing value when future rounds happen at lower valuations.They do not stop dilution in general — and they do not protect founders.

As a founder, you don’t need to know formulas by heart — but you must understand:

• What kind of anti-dilution your investor is asking for

• When it triggers

• How big its impact can be
  

Getting clarity today avoids headaches — and unexpected dilution — tomorrow.

Key Takeaway for founders:  

Down-rounds are not rare - and anti-dilution clauses matter. Don’t ignore them thinking this is not a likelihood. Always ask how they apply and to what extent.