AS | Ankit Sarawagi|Founder, CFOmatrix·June 2026·11 min read | Updated Jun 2026 |
- Anti-dilution only fires on a down round: a new raise priced below what an earlier investor paid. It does nothing on an up round.
- It works by lowering the investor’s conversion price, so their preference shares (CCPS) convert into more equity shares for free. That extra equity comes out of the founders and the ESOP pool.
- Full ratchet is harsh: it resets the investor’s price all the way down to the new low price, as if they always invested at the bottom.
- Weighted average is fair: it resets the price only partway, scaled to how big the down round really was.
- Broad-based weighted average is friendlier to founders than narrow-based, because it counts more shares in the formula and so dilutes you less. Push for broad-based weighted average.
| Down round The only thing that triggers anti-dilution: a new raise priced below the earlier investor’s entry price | 20% The Series A Investor’s stake before any down round, on our cap table, invested at ₹100 crore post-money | Broad-based The weighted-average variant to push for: it counts the most shares and so dilutes founders the least |
Every scenario below uses this cap table. The Series A round set the company’s post-money valuation at ₹100 crore. Founders and the ESOP pool hold equity shares; the two investors hold preference shares (in India, usually CCPS), and it is their conversion price that anti-dilution adjusts.
| Shareholder | Holding | Share Type | Capital Invested |
|---|---|---|---|
| Founder A (CEO) | 30% | Equity Shares | Nil |
| Founder B (CTO) | 22% | Equity Shares | Nil |
| Founder C (COO) | 8% | Equity Shares | Nil |
| Angels & ESOP pool | 5% | Equity Shares | Nil |
| Seed Investor | 15% | Preference (CCPS) | ₹6 crore |
| Series A Investor (lead) | 20% | Preference (CCPS) | ₹20 crore |
What Anti-Dilution Protection Actually Is
Plain definition: Anti-dilution protection is a right that gives an earlier investor extra shares for free if the company later raises money at a price per share that is lower than what that investor paid. It does this by lowering the price at which the investor’s preference shares (CCPS) convert into equity shares, so the same investment converts into more equity.
Why it’s in the agreement, and whose interest it serves: The investor handed you a big cheque at a price set by a valuation. If the company’s value later falls and a new investor gets in cheaper, the earlier investor feels they overpaid. Anti-dilution is their insurance against that: it pulls their effective entry price down toward the new, lower price so they are not the only one stuck holding expensive shares. It protects the investor’s price per share, not your percentage.
Ordinary dilution happens to everyone every time you issue new shares: your percentage shrinks because the pie has more slices. That is normal and unavoidable. Anti-dilution is something extra: it shifts even more of the pie to one investor, on top of ordinary dilution, but only when a down round happens. This post is about that second, extra layer.
The Trigger: It Only Fires on a Down Round
Plain definition: A down round is a new fundraise priced below the price an earlier investor paid. That price drop is the one and only event that switches anti-dilution on. No down round, no adjustment.
Our Series A Investor came in at the ₹100 crore post-money valuation. Whether anti-dilution fires depends entirely on the next round’s price:
An up round: nothing happens
The company raises a Series B at a ₹200 crore pre-money valuation, a price per share well above what the Series A Investor paid. Everyone is diluted a little by the new shares (ordinary dilution), but the Series A Investor’s shares are now worth more per share than at entry. Anti-dilution does not trigger. There is nothing to protect against.
A down round: the clause wakes up
The market turns. The company has to raise its next round at a ₹50 crore pre-money valuation, half of where the Series A came in. The new investor is buying shares at roughly half the Series A price. Now the Series A Investor’s anti-dilution right triggers, and how badly the founders are hit depends on which flavour was written into the SHA: full ratchet, or weighted average.
Down rounds feel remote when you sign, so founders wave the clause through. But the flavour you agree to today is locked in for the round when you are most desperate for cash and have the least leverage. Negotiate anti-dilution as if a down round will happen, because the clause only ever matters if it does.
Full Ratchet: the Harsh One
Plain definition: With a full ratchet, the earlier investor’s conversion price is reset all the way down to the new, lower price, no matter how few shares the down round actually issued. They are treated as if they had always invested at the rock-bottom down-round price.
Why it’s in the agreement: It is the most aggressive protection an investor can ask for. It fully insulates them from a price drop and dumps the entire cost of the down round onto the founders and the ESOP pool. It is not market standard for a clean round and is a serious red flag.
Say the Series A Investor’s ₹20 crore originally converted at a price that bought them their 20%. The new round is priced at half that price. Full ratchet resets their conversion price to that half-price, so the same ₹20 crore now converts into roughly twice as many equity shares.
Their stake roughly doubles toward the high 30s in percentage terms, purely from the reset, before the new investor’s shares are even added. Every one of those extra shares is carved out of the founders and the ESOP. It does not matter whether the down round raised ₹2 crore or ₹40 crore: full ratchet ignores the size and just resets to the price.
The cruelest feature of full ratchet is that it ignores size. A tiny ₹1 crore bridge at a low price can trigger the same brutal reset as a large round. If an investor insists on a ratchet, at least cap it (a “partial ratchet”), or, far better, swap it for weighted average. Never sign full ratchet without modelling your post-reset percentage first.
Weighted Average: the Fair One
Plain definition: With weighted average anti-dilution, the investor’s conversion price drops only partway, in proportion to how big the down round was relative to the whole company. A small down round nudges the price down a little; a large down round nudges it down a lot. The price never crashes all the way to the new low (that would be full ratchet).
Why it’s in the agreement: It is the fair, market-standard compromise. The investor still gets real protection on a genuine down round, but the cost to founders is proportional, not punitive. A small, cheap bridge no longer triggers a catastrophic reset.
The new conversion price is the old price blended with the new low price, weighted by how many shares already existed versus how many cheap new shares were issued. In plain terms: a few cheap shares against a large existing base barely move the average, so the price barely drops.
On our same half-price down round, weighted average might nudge the Series A Investor from 20% to roughly 23 to 25%, depending on the round size, versus the high-30s reset under full ratchet. Same down round, a fraction of the founder pain.
That single phrase, “the size of the round matters,” is the whole difference. Full ratchet asks only “what was the new price?” Weighted average asks “what was the new price, and how much was actually raised at it?” The second question is the fair one.
Broad-Based vs Narrow-Based: the One Word That Costs You
Once you have agreed to weighted average, there is a second hidden choice that quietly decides how much it stings: broad-based or narrow-based. Both use the same formula. They differ only in which shares you count as the “existing base.”
Broad-based counts everything: all equity shares, all preference shares, the ESOP pool, and convertible instruments. A bigger base means the cheap new shares are a smaller fraction of it, so the conversion price drops less and founders are diluted less.
Narrow-based counts only a slice, usually just the existing preference shares. A smaller base means the same cheap new shares loom larger, so the conversion price drops more and founders are hit harder.
On our half-price round, broad-based weighted average might move the Series A Investor from 20% to around 23%: the large all-shares base softens the blow.
Narrow-based, counting only the 35% of preference shares between the two investors, might move them to around 26 to 27% instead. Same formula, same down round, but the narrower base hands the investor extra points of your company.
“Weighted average” on its own is not enough to feel safe. A term sheet can say weighted average and still mean narrow-based, which is meaningfully worse for you. Always check the definition, and insist the formula counts all shares on a fully diluted basis, including the ESOP pool and convertibles. The phrase you want in writing is “broad-based weighted average.”
All Three, Side by Side
Here is the whole spectrum on one down round, from the version you want to the version you fight: broad-based weighted average is friendliest to you, full ratchet is harshest.
| Broad-Based Weighted Avg | Narrow-Based Weighted Avg | Full Ratchet | |
|---|---|---|---|
| How far the price resets | Partway, gently | Partway, harder | All the way down |
| Does round size matter? | Yes | Yes | No |
| Shares counted in formula | All shares (fully diluted) | Preference shares only | Not applicable |
| Series A after half-price round | ~23% | ~26 to 27% | high 30s |
| Friendlier to | The founder | The investor | The investor (most) |
Full ratchet = full pain (the price ratchets all the way down). Weighted average = fair (the size of the round is weighed in). And broad beats narrow: the broader the base of shares counted, the gentler your dilution. Aim for the widest base and the gentlest reset: broad-based weighted average.
How It Fires in a Real Down Round
In an actual down round, the steps run in a fixed order. Money and shares move down this sequence:
1 | A new round is priced below the last one The new price per share falls below what an earlier investor paid. This is the trigger; an up round skips everything below. |
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2 | The conversion price is recalculated Full ratchet drops it to the new low price; weighted average drops it partway, using the agreed (broad or narrow) share base. |
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3 | The earlier investor converts into extra shares A lower conversion price means the same investment now converts into more equity shares, all issued for no new money. |
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4 | Founders and ESOP absorb the dilution Those extra shares come out of the equity shareholders’ slice. Founders are diluted twice over: once by the new round, again by the reset. |
Anti-dilution rarely lives alone. Read it together with the liquidation preference (a reset gives the investor more shares and they still sit ahead of you on an exit) and with your valuation (the entry price you accept today sets the line a future round must stay above to avoid triggering this clause). Before any down round, model your post-reset cap table under all three flavours. The version in your SHA can swing your stake by double digits.
“Anti-dilution is the clause that bites hardest at the exact moment you can least afford it: the down round you didn’t see coming.”
Ankit Sarawagi, CFOmatrixFrequently Asked Questions
What triggers anti-dilution protection?
A down round: when the company raises new money at a price per share lower than what an earlier investor paid. It does not fire on a normal up round, and it does not protect against ordinary percentage dilution from raising more capital. It only kicks in when the share price falls below the earlier investor’s entry price.
What is the difference between full ratchet and weighted average?
Full ratchet resets the earlier investor’s conversion price all the way down to the new, lower price, as if they had always invested at the down-round price. Weighted average resets it only partway, in proportion to how big the down round was relative to the company. Full ratchet is harsh on founders; weighted average is the fair, market-standard structure.
What is the difference between broad-based and narrow-based weighted average?
Both use the same weighted-average formula; they differ in the share count plugged into it. Broad-based counts all shares (equity shares, preference shares, the ESOP pool, and convertibles), so the adjustment is smaller and founders are diluted less. Narrow-based counts only the existing preference shares, so the adjustment is larger and founders are hit harder. Broad-based is founder-friendlier.
Who pays for anti-dilution protection?
The founders and the ESOP pool, in dilution. When an earlier investor’s conversion price drops, their preference shares convert into more equity shares for free. Those extra shares come out of the equity shareholders’ ownership, so the founders’ percentage shrinks while the investor’s grows.
What anti-dilution should a founder push for?
Broad-based weighted average. It is the market-standard, founder-fair version: it still protects the investor on a real down round, but it shares the pain fairly and avoids the brutal reset of full ratchet. If a term sheet says full ratchet or narrow-based, that is the first thing to negotiate.
Does anti-dilution apply if I raise at a higher valuation?
No. Anti-dilution only adjusts on a down round, where the new price per share is below the earlier investor’s price. An up round at a higher valuation does not trigger any conversion-price adjustment, even though everyone’s percentage still shrinks from the new shares issued.
This is a general explanation for founders, not legal advice. Indian deals involve specific structures (CCPS, FEMA rules on share transfers and pricing, and the way conversion-price adjustments are drafted into the Articles of Association). Have your term sheet and SHA reviewed by a lawyer before signing.
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- Startup Valuation Explained: Pre-Money, Post-Money & Price Per Share Investment Agreements · SHA Series
AS | Founder, CFOmatrix | Finance Strategy & Equity Compliance CFOmatrix is a knowledge platform focused on how finance actually works inside growing companies. Every insight is shaped by real operating experience across startups and growth-stage companies, including cross-border setups. |