In India, the inclusion of ‘Anti-Dilution Rights’ in definitive agreements governing a startup or venture capital deal is quite common. These Anti-Dilution Rights provide protection to the investors against the dip in value of their newly purchased shares in the future event of subsequent investments in the startup company. This is actually quite fair in the case of startups because, at the time of any venture capital investment, startup companies are in a volatile stage and it is quite difficult to predict which way the valuation of the startup company will go in the subsequent rounds of investments.

Anti-Dilution Rights of the investors in a venture capital deal will trigger only when the subsequent rounds of investment in the startup company is made below the value paid by the investor in the original round of investment. Therefore, if the subsequent rounds of investments in a startup is made at a value more than the value at which the original investor had originally invested, then although the original investor’s shareholding in the startup company may get diluted, the value of his shares will actually increase in the market.

In the event the subsequent rounds of financing in the startup company is made at a price per share lower than the price per share paid by the original investor, the Anti-Dilution Rights of the investor gets triggered and accordingly the investor shall have the right to subscribe to additional shares of the startup company at no additional cost or at a significantly lower price. Thus, the original investor gets additional shares to compensate for the loss of value of the shares purchased by him originally. There are two mechanisms for Anti-Dilution Rights protection: i. Full Ratchet Method; and ii. Weighted Average Method. [these methods will be discussed in the coming parts to this story]