Anti-Dilution Provisions in Indian VC Term Sheets: What Founders Must Know

Anti-dilution provisions are among the most impactful yet often misunderstood clauses in venture capital term sheets. These provisions protect investors in the event of a future financing round at a lower valuation (a "down round"), but they come at the direct expense of founder and employee equity. Understanding the mechanics and negotiating effectively is critical for Indian founders.

How Anti-Dilution Works

When a company raises capital at a lower price per share than a previous round, anti-dilution provisions adjust the conversion price of the earlier investor's preferred shares downward. This effectively grants the protected investor additional shares to compensate for the valuation decrease, diluting other shareholders including founders and employees.

Full Ratchet vs. Weighted Average

Full ratchet anti-dilution adjusts the conversion price to the new, lower price regardless of the size of the down round. This is extremely punitive for founders. Broad-based weighted average anti-dilution takes into account both the new price and the number of new shares issued, providing a more balanced adjustment. This is the market standard in Indian VC transactions.

Impact Scenarios

• Small Down Round: Under weighted average, a small down round has minimal dilutive impact on founders.
• Significant Down Round: Even under weighted average, a large down round can substantially dilute founders and employees.
• Pay-to-Play: Some term sheets include pay-to-play provisions requiring investors to participate in the down round to maintain anti-dilution protection.

Negotiation Strategy

Founders should push for broad-based weighted average anti-dilution (never accept full ratchet), include pay-to-play provisions, negotiate carve-outs for certain equity issuances (ESOPs, strategic partnerships), and consider sunset clauses that expire anti-dilution protection after a defined period or upon the company reaching certain milestones.