Anti-dilution protection is a clause almost every investor asks for in the term sheet, and it only matters in one painful scenario: a down round, where you raise your next round at a lower price per share than an earlier investor paid. When that happens, anti-dilution rewrites the maths in the earlier investor's favour, giving them extra shares to soften the blow. That dilution comes straight out of your own holding, so the form of anti-dilution you agree to can change how much of your company you keep. This lesson covers the two main forms and why broad-based weighted-average is the version worth pushing for.
What actually triggers it
Anti-dilution does nothing in a flat or up round. It only kicks in when new shares are issued below the price an earlier investor paid. The clause then lowers that investor's "conversion price," which lets their preference shares convert into more equity shares than before. There are two ways to recalculate that conversion price: full-ratchet and weighted-average.
Full-ratchet: the harsh version
Full-ratchet resets the earlier investor's conversion price all the way down to the new, lower round price, no matter how few shares were sold at that price. If they paid ₹100 per share and you later issue even a small tranche at ₹50, their conversion price becomes ₹50. They receive a large block of extra shares, and that dilution lands almost entirely on the founders and the option pool. Full-ratchet is punishing and is used in only a small minority of venture deals. Treat a full-ratchet ask as something to negotiate away.
Weighted-average: the market-standard version
Weighted-average is fairer because it accounts for the size of the down round, not just the price. A tiny down round moves the conversion price only slightly, while a large one moves it more. The standard formula is:
New conversion price = Old price × (A + B) ÷ (A + C)
- A = shares outstanding before the new issue
- B = money raised ÷ old conversion price, meaning the shares the new money would have bought at the old price
- C = shares actually issued in the down round
The real negotiation point sits inside "A." In a broad-based weighted-average, A includes the fully diluted share count: all equity shares, options, warrants and other convertibles. In a narrow-based version, A counts a smaller base, which produces a bigger drop in the conversion price and more founder dilution. Broad-based is both the founder-friendlier and the market-standard choice.
A quick example
Say an investor's old conversion price is ₹100, there are 10,000,000 shares before the round (A), and you raise ₹10 crore by issuing 2,000,000 new shares at ₹50 (C). Then B = ₹10 crore ÷ ₹100 = 1,000,000. Broad-based weighted-average gives a new conversion price of ₹100 × (10,000,000 + 1,000,000) ÷ (10,000,000 + 2,000,000), which is about ₹91.7. Under full-ratchet, the same investor's conversion price would instead collapse to ₹50. Same down round, very different cost to you.
The India layer: CCPS and the FEMA price floor
In India, most priced rounds use Compulsorily Convertible Preference Shares (CCPS), so anti-dilution is implemented by adjusting the CCPS conversion ratio, giving the investor more equity shares on conversion. But there is a hard regulatory limit when the investor is a foreign or non-resident entity. Under the FEMA Non-Debt Instruments Rules, 2019 (Rule 21), the price at which a convertible instrument converts cannot be lower than the fair market value determined at the time it was issued, valued by a SEBI-registered merchant banker or a chartered accountant. That makes aggressive anti-dilution, especially full-ratchet, hard to honour fully for foreign investors, because you cannot convert below that floor or issue shares free of cost. A common workaround is to issue the original shares slightly above fair value, creating a cushion that a later downward adjustment can absorb.
What to do as a founder
Accept anti-dilution, since investors expect it, but insist on broad-based weighted-average and reject full-ratchet. Ask for standard carve-outs so that ESOP grants, conversions of existing instruments, and shares issued in strategic or M&A transactions do not trigger the clause. And model a hypothetical down round on your own cap table before signing, so you can see exactly how much each version would cost you.