Adapted from the Polish article, originally published on 25 August 2026 and updated on 18 September 2026. The English version was published on 01 October 2026.
A founder owns 40% before a funding round and 30% afterwards. Has someone taken a quarter of their shares?
Not necessarily. The founder may still hold exactly the same number. The company has issued more shares, so that holding now represents a smaller part of the total. That is dilution.
Dilution can make commercial sense when new capital helps the business grow. The problem is agreeing a valuation without calculating the option pool, convertible instruments, pro rata rights and anti-dilution protection together. “The investor gets 20%” may describe only one step in the final cap table.
The financing concepts below are used across markets. Their legal implementation depends on the company and documents. A separate section explains the position for a Polish limited liability company, or sp. z o.o.
What you will learn
- How a new share issue dilutes existing holdings.
- Why pro rata and anti-dilution address different risks.
- How full ratchet differs from weighted-average protection.
- Why a statutory subscription right may not cover the negotiated deal.
- What to model before signing a term sheet.
- How the option pool, convertibles and corporate documents fit together.
In brief
- Pro rata gives an eligible holder an opportunity to invest again to maintain their percentage.
- Exercising it requires money, timely notice and action within the agreed window.
- Anti-dilution usually protects an earlier investor against a later issue at a lower price.
- It can improve that investor’s position without a proportionate new cash investment.
- Full ratchet is generally more costly for unprotected founders than weighted-average protection.
- Model the whole transaction sequence before accepting the name of a clause.
The denominator changes
Suppose two founders each own 50 shares. There are 100 shares in total. The company issues 25 new shares to an investor. There are now 125:
- Founder A still has 50 shares, but their holding falls from 50% to 40%.
- Founder B still has 50 shares, also falling to 40%.
- The investor holds 25 shares, representing 20%.
The founders’ combined percentage has fallen from 100% to 80%. That need not be a poor result. If the investment enables the company to multiply its value, the smaller percentage may be worth substantially more.
But percentage ownership is only part of the analysis. Check voting rights, rights on an exit, any preferential economic rights and the basis on which the cap table is presented. A current issued-share calculation and a fully diluted calculation can give different answers.
The objective is to understand what percentage, control and economic value remain after every agreed mechanism has operated.
Before the round, establish who absorbs the option-pool expansion, how earlier loans or other convertibles are treated, and how the new structure affects control and a future exit.
Pro rata is an opportunity to invest
A pro rata right allows an eligible holder to participate in a later financing on a basis intended to preserve their existing percentage. It does not preserve that percentage automatically.
An investor with 10% may be entitled to subscribe for enough of the new issue to retain 10% after closing. They still need to receive the notice, decide in time and contribute the additional capital.
The clause should answer:
- Who qualifies, and is there a minimum ownership threshold?
- Which issues and instruments are covered?
- Is entitlement calculated on issued capital or a fully diluted basis?
- How do options, the employee share option plan or ESOP, warrants and convertibles affect the calculation?
- What information must the company provide about the round?
- How long does the holder have to elect and pay?
- Who can take the allocation left unused by another eligible holder?
- Which issues are excluded?
A founder can receive wording identical to a fund’s and still have much less practical protection. The fund may have money reserved for follow-on investment. The founder may be unable to contribute several hundred thousand PLN. Equal contractual wording does not create equal financial capacity.
Some arrangements permit an investor to take more than their proportionate allocation, including unused allocations. This is sometimes called super pro rata. Define the entitlement rather than relying on the label.
Polish implementation: statutory pre-emption is not the whole deal
For a Polish sp. z o.o., Article 258 of the Commercial Companies Code, in Polish generally gives existing shareholders priority to subscribe for new shares in proportion to their holdings. The articles of association or capital-increase resolution may provide otherwise.
The statutory mechanism generally allows one month to exercise the right following the management board’s simultaneous notice to shareholders. A negotiated pro rata clause may cover a wider range of events and contain a more detailed process than this statutory subscription right.
Read the articles, founders’ or shareholders’ agreement, earlier investment documents, the new term sheet and the proposed capital-increase resolution together. A right in one document should not be assumed to override a different mechanism in another.
This is a Polish corporate-law layer. It does not establish the statutory subscription rules for companies incorporated elsewhere.
Anti-dilution addresses a lower issue price
Anti-dilution protection usually addresses a down round: a later issue at a price below the earlier investor’s price.
Suppose the earlier investor paid PLN 100 per comparable unit of equity. A year later, the company needs funding and issues at PLN 50. The anti-dilution clause determines whether and how the earlier investor’s economic position is adjusted.
Unlike pro rata, the adjustment need not require a new cash contribution proportionate to the additional protection. Depending on the instrument and company structure, it may involve a conversion-ratio adjustment, additional rights, a new instrument or another corporate action.
Anti-dilution does not remove the cost of a down round. It allocates more of that cost to particular people in the cap table.
The negotiated economics must be executable under the company’s governing law. A mechanism copied from US venture documents does not automatically work in a Polish sp. z o.o. The parties need to establish the corporate steps, instruments and commitments that will deliver the agreed result.
Full ratchet and weighted average
Full ratchet broadly adjusts the earlier investment as though it had been made at the new, lower price. A relatively small down round can therefore trigger a substantial adjustment. It offers strong investor protection but can be expensive for founders and the option pool.
Weighted-average protection takes account of both the lower price and the size of the new issue. A small issue generally produces a smaller adjustment than a large issue at the same price.
The common distinctions are:
- Broad-based weighted average: a broader equity base is included in the calculation.
- Narrow-based weighted average: a narrower base generally produces a stronger adjustment for the protected investor.
- Full ratchet: the earlier price is adjusted to the lower price without a comparable weighting for round size.
- No anti-dilution: the earlier investor bears dilution under the ordinary transaction mechanics.
The exact formula and definitions matter. “Weighted average” alone does not say which options, warrants or convertibles are included in the denominator. With a substantial ESOP and several outstanding instruments, those definitions can materially change the result.
Who bears the protection’s cost?
With pro rata, an investor maintains their percentage by putting in more money. Other holders may do the same if they have the right and sufficient funds.
With anti-dilution, the protected investor receives an economic adjustment. The additional dilution generally falls on unprotected holders, often founders, employees participating in the ESOP and other investors.
That does not make every anti-dilution clause unreasonable. An investor may seek protection against a large, lower-priced issue soon after investing. Founders should nevertheless see the cost in numbers and negotiate the protection with that cost in mind.
Agree the exceptions
A clause without appropriate exclusions can interfere with ordinary company development. Not every issue below the investor’s historic price should accidentally trigger the same protection.
Common subjects for negotiated exclusions include:
- Shares or options issued under an approved ESOP.
- Conversion of instruments disclosed before the investment.
- Equity used in an acquisition or an asset transaction.
- An issue to a strategic partner within agreed limits.
- Technical adjustments such as a share split.
- Issues approved by the relevant protected investors.
Define the limits of each exclusion. “Employee shares” should not become an unlimited route around the clause, and “strategic investor” should not depend only on someone using that description in an email.
A hypothetical case: five mechanisms in a rescue round
This is an illustrative scenario, not a client history. Two founders each hold 42.5%, an angel holds 10%, and 5% is allocated to the ESOP. The seed valuation was PLN 12 million.
Eighteen months later, the company loses a key customer. It needs PLN 2 million, and the new investor proposes a PLN 8 million pre-money valuation. The earlier term sheet promised “standard anti-dilution”, without specifying a formula, exceptions or implementation in the Polish sp. z o.o.
The new investor also wants the ESOP expanded to 10% before investing. The angel wants to exercise pro rata and claims full-ratchet protection. An earlier loan is due to convert.
The founders’ final holdings therefore depend on five interacting steps:
- Expanding the ESOP before the round.
- Issuing equity to the new investor.
- Applying the anti-dilution adjustment.
- The angel’s additional pro rata investment.
- Converting the earlier loan.
The investment amount and headline valuation do not establish the founders’ final percentages. The model must specify the order, definitions and treatment of each instrument.
A workable document set would include the anti-dilution formula, agreed cap-table basis, treatment of the approved ESOP, pro rata election and payment process, transaction sequence and necessary corporate documents.
Put the cap table beside the term sheet
Before signing, model a normal round, a down round and a rescue round. Show issued and fully diluted ownership, relevant voting rights and economic rights on an exit. Keep the assumptions visible.
Our term-sheet guide explains why headline commercial terms and legally binding commitments need separate attention. A founders’ agreement can prepare the team for financing by allocating negotiation responsibility and specifying which changes require joint consent.
Agree who maintains the cap table, whether founders have pro rata rights, what dilution or ESOP expansion is a reserved matter, and whether a down round needs additional approval. Check the relationship with founder vesting and IP due diligence, rather than negotiating each document in isolation.
If the numbers only become clear after signing, the negotiation has happened too late. For help translating financing economics into executable Polish company documents, see our startup legal support or legal subscription for ongoing founder decisions.
Primary legal source
- Polish Commercial Companies Code, particularly Article 258, official Polish text. The financing scenarios and commercial recommendations above are explanatory models, not statutory formulas.