Founder explainer · 3 min read
Anti-dilution protection: full ratchet vs weighted average
Anti-dilution protection gives investors more shares if the company later raises money at a lower price per share than they paid, in what is called a down round. It works by lowering the price at which their preference shares convert into ordinary shares. Full ratchet is the harshest version for founders; broad-based weighted average is the mildest and the most common.
By the StartupReader editorial desk · Updated 2026-10-28 · Worked examples are illustrative
Anti-dilution protection
- weighted average, the usual standard
- Broad-based
- broad-based conversion price in our example
- ₹83.33
- full-ratchet conversion price in our example
- ₹50
- Series A shares under full ratchet in our example
- 2×
What it protects against
Every new round reduces existing shareholders' percentages, and anti-dilution does nothing about that. It protects only against new shares being sold below the price an earlier investor paid.
Investors usually hold preference shares (in India, usually CCPS) that convert into ordinary shares at a conversion price. Anti-dilution lowers that conversion price, so each preference share converts into more ordinary shares. The extra shares come out of everyone without the protection, mainly founders and employees.
Full ratchet, broad-based and narrow-based
The formula decides how far the conversion price falls.
| Method | How the conversion price changes | Effect on founders |
|---|---|---|
| Full ratchet | Drops to the new, lower price, however few shares are sold | Harshest |
| Narrow-based weighted average | Falls part of the way, weighted against a smaller share count | Moderate |
| Broad-based weighted average | Falls part of the way, weighted against all shares on a fully diluted basis | Mildest; the usual standard |
The weighted-average formula
New conversion price = old price × (A + B) ÷ (A + C).
A is the number of shares outstanding before the new issue, B is the number of shares the new money would have bought at the old price, and C is the number of new shares actually issued. Broad-based versions count everything in A: issued shares, options and the unallocated pool. Narrow-based versions count a smaller group, for example issued shares only, which makes A smaller and the adjustment larger.
Worked example: a down round
Illustrative figures. A company has 10,00,000 fully diluted shares: founders 6,50,000, an option pool of 1,25,000, and a Series A investor with 2,25,000 preference shares bought at ₹100 each (₹2.25 crore). It then raises ₹2.5 crore at ₹50 a share, issuing 5,00,000 new shares. B is ₹2.5 crore ÷ ₹100 = 2,50,000.
Broad-based: ₹100 × (10,00,000 + 2,50,000) ÷ (10,00,000 + 5,00,000) = ₹100 × 12,50,000 ÷ 15,00,000 = ₹83.33. Each Series A share now converts into 15,00,000 ÷ 12,50,000 = 1.2 ordinary shares, so 2,25,000 become 2,70,000.
Narrow-based, counting the 8,75,000 issued shares and leaving out the pool: ₹100 × (8,75,000 + 2,50,000) ÷ (8,75,000 + 5,00,000) = ₹100 × 11,25,000 ÷ 13,75,000 = ₹81.82. The 2,25,000 shares convert into 2,25,000 × 13,75,000 ÷ 11,25,000 = 2,75,000.
Full ratchet: the conversion price drops to ₹50, so the 2,25,000 shares convert into 2,25,000 × ₹100 ÷ ₹50 = 4,50,000.
| Method | Conversion price | Series A shares (as converted) | Founders' stake after the round |
|---|---|---|---|
| No adjustment | ₹100 | 2,25,000 | 6,50,000 ÷ 15,00,000 = 43.3% |
| Broad-based | ₹83.33 | 2,70,000 | 6,50,000 ÷ 15,45,000 = 42.1% |
| Narrow-based | ₹81.82 | 2,75,000 | 6,50,000 ÷ 15,50,000 = 41.9% |
| Full ratchet | ₹50 | 4,50,000 | 6,50,000 ÷ 17,25,000 = 37.7% |
Anti-dilution in India
The SHA and articles of association set out how the CCPS conversion ratio adjusts in a down round. For foreign investors, foreign-exchange rules generally require the conversion formula to be fixed when the shares are issued, and the conversion price not to fall below the fair value worked out at that time, which can limit how far an adjustment can go. Lawyers deal with this in the drafting, so take advice on how your clause will actually work.
What founders should negotiate
In the example, weighted average costs the founders a little over one percentage point; full ratchet costs more than five and doubles the Series A's shares. The terms worth pushing for:
- Broad-based weighted average, not full ratchet or narrow-based.
- Carve-outs, so shares issued under the ESOP, on conversion of existing instruments or in approved acquisitions do not trigger an adjustment.
- Pay-to-play: investors keep their protection only if they take up their share of the down round.
- A waiver, so a set majority of the protected investors can waive the adjustment to get a rescue round done.
Questions founders ask
What is the most common anti-dilution clause?
Broad-based weighted average. Full ratchet is uncommon in venture rounds and tends to appear only when the company has little negotiating power.
Does anti-dilution apply in an up round?
No. It is triggered only when new shares are issued below the protected investor's price. Ordinary dilution from up rounds is not adjusted.
Do founders get anti-dilution protection?
Usually not. Founders and employees normally hold ordinary shares or options, which is why the extra shares given to investors dilute them.
What is a pay-to-play clause?
A term requiring investors to invest their pro-rata share in a down round to keep their anti-dilution protection, and sometimes their other preference rights. Those who do not may have their shares converted into ordinary shares.
Can anti-dilution be waived?
Yes, if the agreement allows it, usually by a set majority of the protected investors. Waivers are often negotiated as part of a down round so the new money can come in.
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Written by the StartupReader editorial desk with AI assistance, from standard definitions and the examples worked through above; updated 2026-10-28. Rules on tax and foreign investment change, so check the official sources or an adviser before acting. Spotted something wrong? Tell us.