Anti-Dilution Clause

What it Means:

In essence, the Anti-dilution Clause protects investors from the impact of lower-priced shares being issued in subsequent funding rounds. It ensures that if the company issues new shares at a lower valuation, the existing investors' conversion or exercise prices are adjusted to maintain their ownership percentage.

How to Calculate:

The calculation of the Anti-dilution adjustment involves adjusting the conversion or exercise price based on the agreed-upon formula in the investment agreement. Common methods include the Full Ratchet and Weighted Average mechanisms, both designed to mitigate the impact of dilution on the investor's ownership.

Why Measure:

For Indian founders and investors alike, understanding the Anti-dilution Clause is pivotal. Measuring its impact involves assessing how well the provision safeguards investor equity during subsequent fundraising rounds, providing confidence and stability in the startup's financial journey.

Examples:

Suppose an Indian startup's early investor holds convertible securities with an initial conversion price of ₹100 per share. The startup undergoes a new funding round, issuing shares at a lower valuation, say ₹80 per share. Without an Anti-dilution Clause, the investor's ownership would be significantly diluted. However, with the Anti-dilution adjustment, the conversion price is recalibrated to ensure the investor's stake remains protected.

In this scenario, the Anti-dilution Clause preserves the investor's ownership percentage, offering a fair and equitable resolution to the impact of subsequent lower-priced share issuances.

In conclusion, the Anti-dilution Clause is a crucial protective measure for Indian startups and their investors. By comprehending and implementing this clause effectively, founders can attract and retain investment while providing assurance to investors in the dynamic landscape of startup financing.

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