Anti-dilution in action: surviving the fallout of a down round

In a buoyant market valuations generally rise and everyone wins. But when conditions change – whether due to macroeconomic shifts, sector-specific headwinds or company performance – businesses may face a “down round”: a funding round at a lower valuation than the previous one.

Down rounds are painful. They dilute existing shareholders, signal distress and can trigger contractual protections that reshape the cap table.

What is anti-dilution protection?

Anti-dilution clauses protect investors from the impact of a down round. The most common forms are:

• full ratchet: the investor’s conversion price is reset to match the new lower price, regardless of how many shares are issued. This can cause disproportionate dilution of the non-protected shareholders
• weighted average: the conversion price is adjusted based on the number of new shares issued and the price paid – a more moderate approach.

Implications

Anti-dilution can have significant consequences:

• founder dilution: founders may see their ownership reduced dramatically
• cap table complexity: adjustments can create multiple classes of shares and conversion formulas
• investor relations: new investors may resist entering a round that triggers anti-dilution for existing ones.

Companies must model the impact carefully and consider how to preserve balance.

Mitigations

To manage the fallout of a down round, companies may consider:

• waivers: existing investors may agree to waive anti-dilution rights in exchange for other concessions
• restructuring: reclassifying shares or amending articles to simplify the share capital structure
• bridge financing: raising interim capital, perhaps by a convertible loan note, to avoid a formal down round.

Conclusion

Down rounds are challenging, but they can be navigated with the right legal and strategic approach. At Birketts, our Venture Capital team advises founders and investors on managing anti-dilution provisions, preserving relationships and protecting long-term value.