Deal Terms
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Quick Answer
The specific mechanism used to adjust conversion prices in a down round, with full ratchet and weighted average being the two main types.
An anti-dilution ratchet is the specific formula used to recalculate the conversion price of preferred stock when new shares are issued at a lower price. Full ratchet adjusts the conversion price to exactly match the new lower price, while broad-based weighted average takes into account the relative size of the new issuance, resulting in a less punitive adjustment for existing common shareholders.
In Practice
The Series A investors had a full ratchet anti-dilution provision, so when the Series B priced at 50% below their original investment, their conversion price dropped to match — effectively doubling their share count at the founders' expense.
Why It Matters
The type of anti-dilution ratchet significantly impacts how much pain is shared in a down round. Founders should push for broad-based weighted average, which is more standard and less punitive than full ratchet.
VC Beast Take
Full ratchet provisions are a red flag in term sheets. They signal either an inexperienced founder who didn't negotiate or an aggressive investor. In practice, full ratchet can create a death spiral in down rounds that makes the company nearly impossible to finance.
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An anti-dilution ratchet is the specific formula used to recalculate the conversion price of preferred stock when new shares are issued at a lower price.
Understanding Anti-Dilution Ratchet is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Anti-Dilution Ratchet falls under the deal-terms category in venture capital. This area covers concepts related to the financial and legal terms that define investment agreements.
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