Welcome back to the Orrick Legal Ninja Snapshot! In today's fast-evolving venture capital landscape, we're seeing a new twist on an old favorite: sunset or fall-away provisions in antidilution protection. As the German VC market becomes increasingly founder-friendly (again), investors and founders alike are rethinking the balance between risk and reward. Let's take a closer look at what's driving this trend, why it matters, and how to approach it in your next financing round.
1. Antidilution Protection in German VC Financings
Antidilution protection—sometimes called downround protection—is a staple of venture capital deals. While dilution of an investor's ownership percentage is a natural part of a growing company (and typically addressed through pro-rata subscription rights), antidilution clauses specifically protect against price-based dilution. In other words, they shield investors from the devaluation of their stake if new shares are issued at a lower price than what they originally paid (such a financing round at a lower price point than a previous financing round is called a "downround").
There are several flavors of antidilution protection, ranging from the aggressive full-ratchet (which we generally advise against except in distressed or restructuring scenarios), to the more nuanced narrow-based weighted average, and finally to the founder- and company-friendly broad-based weighted average formula (the latter should be the standard, especially in early-stage and early-growth financing rounds).
2. A Recent Spotlight on Fall-Away Provisions
In recent quarters, especially in early growth-stage financings, we've seen a surge in requests for so-called "fall-away" or "sunset" provisions in antidilution protection clauses.
These fall-away provisions are distinct from pay-to-play provisions, which require investors to keep investing in downrounds to maintain their protection. Fall-away provisions, by contrast, provide that an investor's antidilution rights expire after a certain event or period.
Why is this topic (re-)surfacing now? In the German market of 2025, we're so far experiencing a general upward swing in dealmaking and valuations, but the recovery is uneven. Investment activity is concentrated in "hot" sectors like AI, energy, and defense, while other sectors are still lagging behind the funding highs of 2020 and 2021. This selective exuberance means that founders in high-demand sectors have more leverage to negotiate founder-friendly terms—including the limitation or sunset of investor antidilution rights. Investors, meanwhile, are under pressure to deploy capital in competitive deals, making them more open to such requests—especially if they believe the company's trajectory will validate their entry price.
3. Rationale for Antidilution Protection
To understand the logic behind fall-away clauses, let's revisit why antidilution protection exists in the first place. If a company raises a new round at a lower price than the previous round—a so-called "downround"—antidilution clauses ensure that earlier investors are compensated for the drop in value. The core argument is one of information asymmetry: early investors pay a premium based on limited information about the company's prospects. If it turns out that the company was overvalued, and a later round reflects a more realistic price, it would be unfair for early investors to bear the full brunt of that correction.
Antidilution protection is fundamentally about managing risk in the face of uncertainty. Start-ups are, by nature, information-poor environments: founders and investors alike must make decisions based on forecasts, projections, and a healthy dose of optimism. Investors accept this risk, because, hey, that's why it's called venture capital, but antidilution clauses provide a safety net if the optimism proves misplaced.
By issuing additional shares to the affected investors based on an adjusted valuation (which will be calculated applying the formulas mentioned in the beginning), these clauses help ensure that investors aren't disproportionately penalized for betting on the company early (read, when the risk was even higher and information even less available). This, in turn, can make it easier for founders to raise capital in tough markets, as investors feel more secure about downside scenarios.
4. Event- or Time-Based Fall-Away Provisions
Fall-away provisions come in two main flavors: event-based and time-based.
- Event-based fall-away means that antidilution protection expires upon the occurrence of a specific event, typically a successful "qualified" financing round at a higher valuation.
- Time-based fall-away means that the protection lapses after a set period, regardless of whether a new round has occurred.
Both approaches are designed to strike a balance between providing investors with reasonable downside protection and ensuring that founders aren't indefinitely burdened by legacy investor rights. In other words, investors shall be protected against the risks of information asymmetry when during a foreseeable period of time new price-relevant information becomes available but at some point, such investors are owners in an asset class that by its nature is volatile and antidilution protection shall not take away "normal" entrepreneurial risks (again, it its VENTURE capital after all…). In addition, indefinite antidilution rights can become a drag on future fundraising and can deter new investors, who don't want to underwrite legacy protections.
Or as Brad Feld and Jason Mendelson put it in their masterpiece "Venture Deals – Be Smarter Than Your Lawyer and Venture Capitalist" (come on, it has lawyer-bashing in its title, it must be good): "If you over-optimize for downside protection, you risk killing the upside for everyone."
Now let us look at some triggers in more detail:
4.1 Event-Based Fall-Away Provisions
Founders and existing investors may push for clauses that cause antidilution protection to expire after the next financing round—provided it qualifies as a "qualified financing." Usually, this means:
- The next round is not a downround, and often there's a minimum required valuation increase (e.g., Series B price must be at least two times the Series A price).
- The round meets a certain minimum size, to prevent manipulation (e.g., a small round engineered just to trigger the fall-away).
The rationale here is that antidilution protection is meant as a bridge over the next period of uncertainty. If the company's valuation is validated or increased in the next round, the protection has served its purpose. Keeping it in place beyond that point could unfairly shift future risks onto the founders and new investors.
4.2 Time-Based Fall-Away Provisions
Alternatively, parties may agree that antidilution protection lapses after a fixed period (typically 18-24 months post-closing), regardless of whether a new round has occurred. This approach recognizes that, as time passes, the information asymmetry that justified the protection in the first place diminishes. The company's performance, market developments, and new investor interest all help establish a more accurate valuation baseline.
4.3 Alternative Triggers for a Fall-Away
While a qualified financing round and the lapse of a set period are the most common triggers for a fall-away (sunset) of antidilution protection, there are several other potential triggers that parties might consider, depending on their negotiating dynamics and the specific context of the company. Although we do not frequently encounter such triggers in the current market environment, we want to highlight one particular approach to broaden our audiences' toolkits: a fall-away tied to the achievement of certain key business milestones.
In this scenario, antidilution protection would fall away if the company achieves specific, predefined operational or financial milestones, such as:
- Reaching a specified revenue or profitability threshold,
- Launching a key product or entering a new market, or
- Securing a major strategic partnership or customer contract.
The rationale here is that once the company demonstrates strong business performance, the original risk profile that justified antidilution protection is arguably no longer present. In practice, however, we often see these business milestones used not as a trigger for a complete fall-away, but rather as a mechanism to "convert" a particularly harsh antidilution protection (such as a full-ratchet clause) into a more nuanced approach (for example, a narrow-based weighted average clause) for the period after the milestones have been achieved.
5. Some Closing Remarks
Ultimately, the fairness of a fall-away provision depends on context: sector, stage, competitive dynamics, and the negotiating leverage of the parties. In hot sectors, founders may have the upper hand; in tougher markets, investors may insist on longer-lasting protection. Practically, it's wise to:
- Clearly define what constitutes a "qualified financing."
- Set objective thresholds for valuation and round size.
- Consider hybrid approaches (e.g., protection lapses after the earliest of a qualified financing or a set period).
- Document the mechanics in detail to avoid disputes.
- Address edge cases (e.g., bridge rounds, insider-led rounds, or restructurings).
We expect to see sunset and fall-away provisions more often in the new, founder-friendlier era in German VC. By understanding the rationale, structuring the terms carefully, and keeping an eye on fairness for all parties, you can help ensure that your next financing round is both competitive and future-proof.
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