Deal Terms
Anti-Dilution Ratchet
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.
Related Concepts
Further Reading
How to Negotiate a Term Sheet as a First-Time Founder
Your first term sheet is exciting and terrifying. Know what's negotiable, what's standard, and the practical tactics for pushing back on liquidation preferences, board seats, and protective provisions.
Startup Equity: What Founders Don't Understand Until It's Too Late
Most founders think equity is simple: you own X%. But option pools, liquidation preferences, and preferred stock can quietly eat your returns. Here's what actually happens.
Lead Investor vs Follow-On Investor: What Founders Need to Know
Your lead investor sets the terms, anchors the round, and signals to the market. Getting this wrong can stall your fundraise for months. Here's how lead and follow-on dynamics actually work.
How to Negotiate Your Term Sheet: A Founder's Playbook
A tactical guide to negotiating your startup term sheet — which terms matter most, where to push back, and how to protect your interests without killing the deal.
How to Read a Term Sheet: A Practical Breakdown
Term sheets aren't designed to be readable. Here's a section-by-section guide to what matters, what's standard, and what should make you walk away.
What Happens When a Startup Raises a Down Round
A down round isn't just a lower valuation — it triggers anti-dilution clauses, crushes employee morale, and sends a signal that's hard to undo. Here's the full playbook.
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