Anti-Dilution Protection

Anti-dilution protection shields preference shareholders from economic dilution when the company raises a subsequent round at a price below their conversion price (a down round). The protection adjusts the conversion ratio of their preference shares so they receive more equity shares on conversion.

Three flavours:

• Full ratchet — conversion price drops to the new round's price, regardless of how many new shares were issued. Severely punitive for founders and prior shareholders. Rare in Indian VC.
• Broad-based weighted-average — adjusts conversion price using a formula that considers outstanding shares including the ESOP pool and convertibles in the denominator. This is the Indian VC market standard.
• Narrow-based weighted-average — same formula but the denominator excludes options and convertibles, producing a sharper adjustment than broad-based.

Standard formula (broad-based weighted-average):

`New CP = Old CP × (A + B) / (A + C)`

where A = shares outstanding pre-issue (on a fully-diluted basis), B = shares that would have been issued at the old CP for the new investment amount, C = shares actually issued in the new round.

Indian-context notes:

• Applies to CCPS instruments, which dominate Indian VC. The conversion ratio of the CCPS is recalculated and reflected in the share certificate / cap table.
• Carve-outs are standard — issuances under the ESOP pool, on conversion of existing convertibles, in M&A, or pursuant to bona fide debt financing are excluded from the trigger.
• Pay-to-play provisions (investor must participate pro-rata in the down round to retain anti-dilution) are seen in later-stage Indian rounds but uncommon at Series A/B.

Pitfall: Founders often miss that anti-dilution adjustments compound across multiple down rounds. Model the scenario in your cap table before signing the SHA.