There’s a lot of talk about down rounds now in the venture capital industry since valuations are down. So I suspect a lot of venture-backed companies are dusting off their Series A Preferred Share Agreements and taking a look at the anti-dilution provisions held by their investor(s).

But should your founding team be offended if your venture capital firm exercises its dilution protection provisions when your startup goes through a down round? In a word: No. But many times founders are upset with their VC when their VC exercises anti-dilution provisions.

Of course, dilution is an understandably upsetting event for founders. They worked extremely hard and risked everything to get that $5,000,000 pre-money in the Series A round, but now due to various factors, they need more cash and will get lower valuation in the Series B than they got in the Series A. After the initial investor exercises its anti-dilution provisions, the common stockholders will be left with even less equity in the startup.

But being upset about the dilution doesn’t mean you should be upset at your VC.

First, the anti-dilution provision was part of your funding. You accepted it and to some extent you should be accountable. Even if your late round financing would only be nominally dilutive to your investor, such anti-dilution protection was a material term in getting funded in the first place. Sure, anti-dilution protection can seem like a huge equity squeeze to the common stockholders, but no one forced the startup to take the investor’s cash.

Second, keep in mind that the venture capital firm (through its fund) has limited partners (and fiduciary responsibilities thereto). Venture capital firms are in the business to provide great investment returns for their limited partners. By exercising the anti-dilution provision, the venture capital firm is hoping that the larger amount of shares will help the venture fund improve its return to THEIR investors. (And if they can’t improve their return to investors, the investors will stop investing with such a firm.)

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