Antidilution Clauses in VC-Financed Startups: A European Perspective

Antidilution provisions used in venture capital financing, typically designed to protect certain classes of shares, are a relatively new development in European corporate law. Based on our anecdotal experience, many corporate law practitioners still struggle to understand why such provisions are used at all, given that European law grants shareholders pre-emptive rights to prevent both economic and percentage dilution. To our knowledge, no European corporate law book or article has been specifically devoted to this topic, at least at an international level. In a forthcoming paper we seek to fill that gap, building on prior empirical studies on corporate charters of Italian startups.

The first part of the paper is dedicated to examining the economic functions of antidilution provisions in VC financing transactions. We trace the use of those provisions in convertible securities issuances to show how antidilution clauses in startups’ articles of association fulfil a distinct function. Indeed, the investment cycle within the venture capital ecosystem is much more complex than in public markets or even private equity transactions. There are no metrics to assess the real value of a business project, and the venture capital funds face significant information barriers. Entrepreneurs, competing to attract investment for their startups, seek to persuade venture capitalists to choose their project over many others. They tend to be overly optimistic about their ability to manage the project, the team, and the company’s finances. Thus, a venture capital fund must invest in a company where a strong degree of reliance is required — reliance on the idea, its technical feasibility, and the entrepreneur’s capacity to execute it successfully.

To signal that over-optimism and under-performance will be punished, U.S. venture capital investors typically use convertible securities that include built-in conversion price antidilution adjustments. The conversion price adjustment serves as a mechanism to retroactively readjust the investment price based on new information disclosed during the management of the project, namely when such information reveals that the price initially paid was excessive. This information typically surfaces when the startup seeks additional funding but is unable to issue new shares at a price equal to or higher than that of previous investment rounds. Consequently, the company must issue new shares at a lower valuation (down-round). The lack of investors willing to pay the same or a higher price signals a loss of value for the startup — meaning the original assessment of the entrepreneur’s capabilities was overly optimistic. Accordingly, these conversion price adjustments perform a very different economic function from antidilution clauses in convertible bond issues and pre-emptive rights.

Before proceeding with the comparative examination, we highlight certain idiosyncratic features of the U.S. tax system that have shaped the contractual mechanics and design of antidilution provisions in American VC transactions – something that, notwithstanding the fundamental contribution of a 2002 article by Ronald Gilson and David Schizer, has escaped sufficient scholarly attention, fostering the mistaken belief that the U.S. model is universally optimal and the gold-standard to be emulated. This specificity stems from the U.S. tax treatment of “disproportionate distributions” under Sec. 305 IRC, which may trigger dividend taxation when antidilution protection results in an increase in shareholders’ proportionate interests. To avoid this outcome, U.S. practice relies on conversion ratio adjustments—expressly treated as non-taxable when based on bona fide formulas—thereby shaping both the prevalence of convertible preferred shares and the design of antidilution clauses. This suggests that the dominance of the U.S. model reflects tax-driven institutional constraints rather than an intrinsically superior contractual solution.

These insights lead us to the second part of the paper, which focuses specifically on the contractual practice in the U.K., Italy, and Germany. Using a large set of British startups’ articles of association, we illustrate the highly standardised technique employed in the U.K. to provide antidilution protection to venture capital investors. British clauses provide for the issuance of new shares in favour of the protected VC investor, specifying that such shares “shall be paid up by the automatic capitalisation of available reserves of the Company, unless and to the extent that the same shall be impossible or unlawful or the Investor Majority shall agree otherwise, in which event the Exercising Investors shall be entitled to subscribe for the Antidilution Shares in cash at nominal value”.

We then turn to Italy. Based on an extensive dataset of articles of association, we show that the most recent Italian antidilution clauses reveal two distinct patterns. The first mirrors the U.K. model, though we question its viability within the Italian legal framework. The second adopts a partially different approach based on a non-proportional allotment of the newly issued shares to the protected investors by using (only apparently) the capital contribution of the new investor. Both the full-ratchet and weighted-average formulas are derived from U.K. and U.S. practice and, notably, lead to identical outcomes: protected investors ultimately receive more shares than those originally acquired at the time of investment. We argue that the objections raised in Italy against the latter mechanism stem from an insufficient understanding of how antidilution mechanisms operate, as well as their underlying rationales and functions. Furthermore, we believe our analysis may prove instrumental in addressing similar arguments within other civil-law jurisdictions.

Under German practice, protected investors may subscribe for antidilution shares in cash at nominal value. However, the waiver by other shareholders of subscription rights in the context of a share capital increase requires the unanimous approval of all shareholders. To circumvent this requirement, German practice provides that all shareholders become parties to a shareholders’ agreement, which is achieved through the inclusion of a transfer restriction clause (Vinkulierung) in the articles of incorporation.

Overall, our analysis illustrates how sophisticated contractual design enables professional actors to achieve the same economic outcomes as U.S. antidilution clauses through different legal techniques. It also illustrates how antidilution clauses should be drafted in light of their specific economic function–a function that is distinct from that of antidilution provisions in convertible bonds and not directly comparable to European pre-emptive rights. However, the German experience shows well how mandatory legal principles affect transaction costs in the context of venture-capital-financed startups. These findings should be considered when shaping the forthcoming 28th legal regime.

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Paolo Giudici is a Professor of Business Law at the School of Economics and Management, Free University of Bozen-Bolzano, Italy.
Peter Agstner is an Associate Professor of Business Law at the School of Economics and Management, Free University of Bozen-Bolzano, Italy.
Antonio Capizzi is an Associate Professor of Business Law at Sapienza University of Rome, Italy.

This blog is based on a paper presented at the Fifth LawFin Workshop, Building Europe’s Venture Capital Market: Contractual Transplants, National Challenges, and the Road to a Pan-EU Regime, held online in December 2025.  Visit the event page to explore more conference-related blogs.

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