Deal Terms
Anti-Dilution Ratchet
Last updated
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.
What it is
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.
Operational context
What good looks like
The term is tied to a real workflow, not just a definition.
Ownership, timing, and evidence are clear.
The reader can tell what decision the concept supports.
Related terms point to the next useful explanation.
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.
Related tools and reading
Term Family
Further Reading
VC Term Sheet Template & Guide: Every Clause Explained with Examples
A clause-by-clause breakdown of every standard VC term sheet provision — what each term means, what's market, what to negotiate, and the red flags that cost founders millions.
NVCA Model Legal Documents: Every Form a Startup Founder Needs
The NVCA publishes free legal templates that can save you $10-30K in lawyer fees. Here's every document explained in plain English, plus what to watch for.
VC Interview Questions: 30 Questions They'll Actually Ask (With Answers)
30 real VC interview questions organized by category: technical, market thesis, deal evaluation, and behavioral. With frameworks for answering each one.
The Real Cost of Raising Venture Capital (Fees, Dilution, and Hidden Risks)
Most founders think raising $5M means getting $5M. It doesn't. Here's the real math on dilution, legal fees, time costs, and hidden terms that nobody warns you about.
Series B, C, D, and E Funding: What Each Round Means for Your Startup
Series B, C, D, and E rounds each signal a different stage of risk reduction and scaling. Here's what investors expect at each stage, what valuations look like, and how dilution compounds.
What Is a Term Sheet? Definition, Format, and Sample Template
A term sheet is the foundational document in any VC deal. Learn the definition, format, key sections, and see a sample template to help you negotiate with confidence.
Related Guides
How to Negotiate a VC Term Sheet: A Founder's Leverage Guide
A founder's guide to negotiating VC term sheets: leverage mechanics, which terms actually matter, specific tactics, and real scenarios with concrete playbooks.
How to Read a Term Sheet: Line-by-Line Guide for Founders
Every major term sheet clause decoded: liquidation preference, board composition, anti-dilution, vesting, protective provisions, and more. With a negotiation priority list at the end.
Understanding Startup Equity and Dilution: A Complete Guide
How equity actually works, what dilution really means, and what founders take home in different exit scenarios. Real math, worked examples, no hand-waving.
Related Questions
What is a down round?
A down round is a funding round where a company raises capital at a lower valuation than its previous round. It dilutes existing shareholders and triggers anti-dilution provisions for preferred investors.
What is a term sheet in venture capital?
A term sheet is a non-binding document outlining the key terms and conditions of a proposed investment, serving as the basis for negotiating a final deal.
What is a term sheet?
A term sheet is a non-binding document that outlines the key terms of a proposed investment — valuation, amount, ownership percentage, and governance rights. It's the starting point for negotiating a deal.
What is anti-dilution protection in venture capital?
Anti-dilution protection adjusts an investor's share price downward if the company later raises money at a lower valuation, protecting the investor from being diluted by a down round.
Frequently Asked Questions
What is Anti-Dilution Ratchet in venture capital?
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.
Why is Anti-Dilution Ratchet important for startups?
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.
What category does Anti-Dilution Ratchet fall under in VC?
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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