Rethinking European Antidilution Clauses: Beyond the American Template

A persistent narrative in comparative corporate law holds that European venture capital markets would benefit from adopting American contractual templates. This assumption underlies many policy discussions about harmonizing European VC practices and building a pan-EU regime. The logic seems straightforward: American venture capital is more developed and successful, therefore its legal structures must be superior.

But what if this narrative rests on a misunderstanding? What if the distinctive features of American venture capital contracts reflect not economic efficiency but rather the peculiarities of US tax law?

Paolo Giudici, Peter Agstner, and Antonio Capizzi's recent paper on antidilution clauses in VC-financed startups challenges the conventional wisdom. Their comparative analysis of UK, Italian, and German approaches reveals that European jurisdictions have developed functionally equivalent mechanisms to US conversion price adjustments, mechanisms that achieve the same economic outcomes through different legal pathways. The crucial insight: American practice coalesced around convertible preferred shares with conversion price adjustments largely due to IRC Section 305 tax constraints, not because this approach is inherently economically superior.

This finding has profound implications for how we think about building Europe's venture capital market.

Functional Equivalence and Tax Law

The paper demonstrates that European jurisdictions - the UK, Italy, and Germany - have developed mechanisms functionally equivalent to US conversion price adjustments. UK bonus shares, Italian non-proportional allotment rights, and German capital increases all accomplish antidilution protection, operating through different legal pathways within each jurisdiction's corporate law framework. The crucial difference is that these European mechanisms evolved without the tax constraints that channelled American practice toward a single template.

This is more than a technical legal distinction. If the US approach stems from tax law rather than economic optimality, then European policymakers must reconsider a fundamental question: should they import American contractual templates wholesale, or should they build on their own functionally equivalent, and potentially more flexible foundations?

Where the Analysis Could Go Deeper

Several questions deserve more rigorous examination to strengthen the functional equivalence claim.

The Information Asymmetry Framework. The paper treats antidilution clauses primarily as addressing adverse selection - entrepreneurs misrepresenting capabilities. But down rounds may also result from moral hazard, where insufficient entrepreneurial effort post-investment leads to underperformance. These different agency problems have distinct implications for optimal clause design. Adverse selection problems suggest front-loaded protection that adjusts immediately upon new information. Moral hazard problems might justify graduated protection tied to performance milestones. European mechanisms' flexibility could actually prove advantageous here: bonus shares and non-proportional allotments can be structured to respond differently to these distinct agency problems, while US conversion price adjustments are more rigid in their operation.

Signaling and Standardization. If antidilution protection becomes standard, does it retain its information-correcting function, or become merely redistributive? The evidence suggests we're witnessing precisely this transition. As antidilution clauses have become ubiquitous in European term sheets, they no longer signal investor sophistication or startup risk - they simply represent baseline terms. This standardization paradox actually supports the functional equivalence argument: if all mechanisms have become standard across their respective jurisdictions, the choice among them matters less for signaling and more for operational efficiency and legal compatibility.

The Efficient Pricing Principle. How do antidilution provisions get priced into negotiations? Bargaining theory provides clear predictions. In Nash bargaining models, the value of antidilution protection depends on the threat points - what each party can achieve without agreement. In sequential bargaining à la Rubinstein, the timing of protection (immediate versus deferred) affects its discounted value. European mechanisms may actually facilitate more efficient bargaining because their diversity allows parties to select instruments that match their specific risk profiles and time preferences, rather than forcing all negotiations through a single contractual template.

The Cross-Border Reality

The international dimension reveals both challenges and opportunities. In cross-border deals, the evidence shows a spectrum of approaches. US funds investing in European startups sometimes push for familiar conversion price adjustments, even when local law offers simpler alternatives. But increasingly sophisticated European entrepreneurs and their counsel are pushing back, arguing for locally optimized structures that achieve equivalent protection with lower transaction costs.

The choice of governing law becomes critical. When a UK startup raises capital from both British and American VCs, should the term sheet follow Delaware precedent with conversion price adjustments, or UK company law with bonus shares? The practical answer often depends on where the company expects to exit. US-bound companies may adopt American structures early, while European-focused firms maintain local mechanisms. This suggests the real issue isn't which mechanism is superior in absolute terms, but rather which provides better compatibility with likely exit scenarios.

Building Europe's Venture Capital Market

As European policymakers work toward a pan-EU venture capital regime, the Giudici et al. paper offers an important cautionary tale. The reflexive assumption that American practices are superior can lead to unnecessarily restrictive standardization around a single template that emerged from specific US tax constraints.

Europe should embrace the diversity of its existing mechanisms. UK bonus shares, Italian non-proportional allotments, and German capital increases represent organic solutions within each jurisdiction's legal framework. A pan-EU regime could establish principles of functional equivalence, ensuring different mechanisms achieve comparable economic outcomes while respecting local legal traditions.

The Path Forward

The real question isn't whether European antidilution mechanisms are "as good as" American ones - it's whether Europe's flexibility might actually be advantageous in an evolving global market. Multiple functionally equivalent mechanisms could provide valuable optionality rather than fragmentation.

To realize this vision, we need rigorous demonstration of functional equivalence through worked numerical examples, explicit attention to tax treatment differences within Europe, and careful consideration of transaction cost variations. We also need longitudinal studies examining how different mechanisms affect subsequent funding rounds and exit negotiations.

European venture capital doesn't need to copy America's homework. The Giudici et al. paper takes an important step by revealing that perceived American superiority may be more myth than reality. The path to a thriving pan-EU venture capital market runs not through wholesale contractual transplants, but through recognizing and building upon the functional equivalence that already exists across European jurisdictions.

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Moran Ofir is a Professor at the Faculty of Law at the University of Haifa

This blog is on the discussion of the 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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