Raising capital is often celebrated as a startup milestone. But what founders don’t always anticipate is how the terms of that capital can quietly rewrite ownership and power inside their own company. One of the most misunderstood clauses is anti-dilution, and Anupam Mittal explains its impact with a stark, real-world scenario.
Imagine this: your startup is valued at ₹100 crore. An investor comes in earlier at an effective valuation of ₹80 crore and invests ₹20 crore. Fair deal – your company is now valued at ₹100 crore, and the investor owns 20%.
Fast forward a couple of years. Things don’t go as planned. Cash runs low. Growth slows. You need fresh capital. A new investor steps in, but at a down round valuation of ₹50 crore. He invests ₹10 crore and takes 20% of the company.
Here’s where anti-dilution kicks in.
The earlier investor didn’t sign up to lose value just because the company struggled. Anti-dilution clauses, especially full ratchet anti-dilution – the most founder-unfriendly kind, protect early investors by recalculating their ownership as if they had invested at the lower valuation.
So instead of owning 20%, the first investor is now treated as though ₹20 crore was invested at a ₹50 crore valuation; meaning he should own 40% of the company.
The math is brutal:
- Old investor: 40%
- New investor: 20%
- Founder(s): just 40% left
In one down round, the founder has already lost majority control. If this happens again, the founder may technically still be “CEO” but practically no longer owns the company.
This isn’t a rare edge case. Data from PitchBook shows that during economic slowdowns, over 30 to 40% of funding rounds can be down rounds. And many early-stage Indian startups, eager for capital, sign term sheets without fully understanding anti-dilution protections.
The lesson is simple but uncomfortable: valuation headlines don’t matter as much as terms as valuation is vanity, and terms are reality. A higher valuation today can trap you tomorrow if growth slows. Therefore, a high valuation with harsh anti-dilution can be far more dangerous than a modest valuation with founder-friendly clauses.
As Anupam Mittal’s example shows, dilution doesn’t happen suddenly. It happens quietly, legally, and mathematically. Founders who don’t understand this risk don’t lose their company overnight. They lose it one round at a time.
Written By:
Yashi Bhatia
