Case 062Down rounds, distress and runwayHard
Vimanik Drones raises a down round at Rs 200 a share against a Series B price of Rs 500. Show the new price, the broad-based anti-dilution adjustment and everyone's ownership after the round.
1The situation
Vimanik Drones makes inspection drones for power lines. Its Series B raised Rs 150 crore at Rs 500 a share, a Rs 600 crore post-money valuation, so there are 1.2 crore shares fully diluted. The founders hold 45%, the Series A 20%, the Series B 25% and the option pool 10%.
A large contract slipped and Vimanik now raises Rs 60 crore at a Rs 240 crore pre-money valuation. The Series B has broad-based weighted average anti-dilution; the Series A has none. The new investor's price is set on the 1.2 crore shares before any adjustment.
2Your task
What is the new price per share, what does the Series B's protection do, and who owns what after the round?
Quick check
The round prices at Rs 200, 60% below the Series B. Where does the Series B conversion price land?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
The new price is Rs 200 a share, but the Series B's conversion price moves only to Rs 440, adding 4.09 lakh shares. Rs 60 crore buys 30 lakh new shares, taking the count to 154.09 lakh with the adjustment. Founders fall from 45% to 35.0%, the Series A to 15.6%, the Series B rises to 22.1% and the new investor holds 19.5%. Founders bear the largest share of the anti-dilution cost.
Step 1What is the new price per share?
Divide the pre-money by the shares already there. Rs 240 crore over 1.2 crore shares is Rs 200 a share, 60% below the Series B's Rs 500, and Rs 60 crore at Rs 200 buys 30 lakh new shares. Before any protection, the new investor would own 30 of 150 lakh shares, 20%. Notice the headline: the company was worth Rs 600 crore after the last round and is worth Rs 300 crore after this one, even with the new cash inside it.
Step 2How much does the Series B's protection move its price?
Imagine you paid Rs 500 for a concert ticket and the organiser later sells a few seats at Rs 200. A fair refund depends on how many cheap seats were sold against the full hall, not on the Rs 300 gap alone. Broad-based weighted average sets the new conversion price at Rs 500 times (120 + 12) over (120 + 30) lakh, which is Rs 440. Here 12 lakh is what Rs 60 crore would have bought at Rs 500 and 30 lakh is what it actually buys. The Series B's Rs 150 crore now converts into 34.09 lakh shares instead of 30 lakh, 4.09 lakh more.
Step 3Who owns what after the round, and who pays for the adjustment?
Add the 30 lakh new shares and the 4.09 lakh adjustment shares to the 120 lakh already there: 154.09 lakh. Every holder without protection is diluted by the extra Series B shares, and the founders, with the largest unprotected block, lose the most: 0.96 of the 2.12 points the adjustment moves, about 45%. The new investor also loses 0.53 points, because its price was fixed before the adjustment; expect it to notice.
| Holder | Before | After, no protection | After, broad-based WA | After, full ratchet |
|---|---|---|---|---|
| Founders | 45.0% | 36.0% | 35.0% | 27.7% |
| Series A | 20.0% | 16.0% | 15.6% | 12.3% |
| Series B | 25.0% | 20.0% | 22.1% | 38.5% |
| Option pool | 10.0% | 8.0% | 7.8% | 6.2% |
| New investor | 20.0% | 19.5% | 15.4% | |
| Shares, lakh | 120.0 | 150.0 | 154.1 | 195.0 |
Step 4What happens next in the negotiation?
Two things usually follow, and a strong answer names both. First, the new investor will ask that its 20% be measured after the adjustment; solving for that, it buys 31.08 lakh shares at about Rs 193, and founders fall to 34.7%. Second, the board will worry about the team: founders near a third of the company after a 60% repricing, with options struck at Series B prices now far under water, are a retention risk. The usual fix is a refreshed option pool, which dilutes everyone again, and sometimes a request that the Series B waive part of its adjustment. The extra shares are worth Rs 8.2 crore at Rs 200; keeping the team is worth more to the Series B than that. The limitation of this arithmetic: the Series B's real protection in a sale is its Rs 150 crore preference, which the anti-dilution shares do not change.
Where candidates lose it
The usual mistake is setting the Series B's new conversion price at Rs 200, as if weighted average were a full ratchet. That quadruples the adjustment and makes the founders look far worse off than the term sheet makes them.
The second is forgetting that the adjustment shares come from somewhere. They dilute every unprotected holder, the new investor included, which is why the new investor's price is the next fight.
What the interviewer asks next
- The Series A also had broad-based protection. Recompute the founders' stake.
- Would you, as the Series B, agree to waive the adjustment in exchange for a pay-to-play clause on others?
- How would the answer change if the Rs 60 crore came as a convertible note at a 20% discount to the next round?
Company names and figures are illustrative.