Mandavik Foods raises a down round at Rs 120 a share against a Series A price of Rs 200. Work out the Series A anti-dilution adjustment on a broad base and a narrow base, and say who bears the extra shares.

Broad-based, the conversion price falls to Rs 184 and the Series A gets about 43,478 extra shares; narrow-based, it falls to Rs 180 and about 55,556 extra shares. The narrow base counts fewer existing shares, so the same round looks bigger and the adjustment grows by about 28%. The extra shares are not new money; they come out of everyone else's percentage, mostly the 35 lakh common and option shares held by founders and staff.

Imagine you bought a flat in a building at Rs 1 crore and the builder now sells two more flats at Rs 60 lakh. You were not cheated on all your money, only on the part the new sales dragged down, and that depends on how many flats were sold against how many already existed. Weighted average anti-dilutionA term that lowers an investor’s conversion price when the company later sells shares more cheaply, so the investor converts into more shares. lowers the old price in proportion to how big the cheap round is against the company, not all the way to the new price. That proportion is exactly what the broad versus narrow argument is about.

Broad-based: Rs 200 times 46 over 50 lakh is Rs 184. The Series A's Rs 10 crore now converts at Rs 184, into 5,43,478 shares, so it gains 43,478. Narrow-based: Rs 200 times 36 over 40 lakh is Rs 180, which converts into 5,55,556 shares, a gain of 55,556. Leaving the 10 lakh options and pool out of A makes the same Rs 12 crore look like a bigger share of the company, so the narrow base hands the Series A about 28% more extra shares.

Everyone who does not have the protection. The new investor bought 10 lakh shares at a price fixed in its term sheet, and the extra Series A shares are issued on top. The extra shares dilute the founders, staff and the new investor pro rata, and because common and options are 35 of the 40 lakh, founders and staff carry most of it. Unless the new investor insists that its price already counts the adjustment, which pushes even more of the cost onto common. On a broad base common gives up 0.60 points of ownership; on a narrow base 0.77 points. At Rs 120 a share, the extra shares are worth Rs 0.52 crore and Rs 0.67 crore.

Point out how small the money is first. The whole dispute between the two bases is about 12,077 shares, roughly Rs 14 lakh at the new price, on a company that has just repriced by 40%. Broad-based is the more common market convention because options and the pool are real claims on the company, so it is the reasonable default. The bigger lever is elsewhere: founders often ask the Series A to waive part of the adjustment in exchange for a refreshed option pool, because a demoralised team costs the Series A more than 43,478 shares are worth. The limitation of the formula is that it treats every down round the same way, whether the company is in trouble or simply over-priced last time.