Deal Terms
Last updated
Quick Answer
The most aggressive anti-dilution provision — resets an investor's conversion price to match any lower future round price, regardless of how many shares are issued.
Full ratchet anti-dilution means if a company raises a down round, early investors' shares convert to common at the new lower price — giving them more shares regardless of how many new shares are issued. Unlike weighted average anti-dilution (standard), full ratchet ignores deal size, making it extremely punishing.
Example: Investor buys at $10/share. Company raises down round at $1/share. Full ratchet resets conversion price to $1, giving investor 10x more shares — massively diluting founders and employees.
In Practice
In the dot-com bust, startups with full ratchet provisions that needed bridge rounds at lower valuations saw investors receive 80-90% of the company through conversion. Founders and employees were left with nearly nothing despite years of work.
What good looks like
Why It Matters
Full ratchet provisions are a major red flag in term sheets. Most sophisticated founders negotiate it out entirely, accepting only weighted average anti-dilution as the standard.
VC Beast Take
Never accept full ratchet anti-dilution. It's one of the most founder-hostile provisions in venture. Standard market terms use broad-based weighted average anti-dilution, which is far more balanced. Any investor insisting on full ratchet is a red flag worth taking seriously.
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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.
Full ratchet anti-dilution means if a company raises a down round, early investors' shares convert to common at the new lower price — giving them more shares regardless of how many new shares are issued.
Understanding Full Ratchet is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Full 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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