Deal Terms
Ratchet
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Quick Answer
An aggressive anti-dilution mechanism that resets an investor's conversion price to the lower of the original price or any subsequent lower price — also called full ratchet.
A ratchet (or full ratchet anti-dilution) is the most aggressive form of anti-dilution protection. If a company issues a single share at a lower price than the investor paid, the ratchet resets the investor's entire conversion price to that lower price — regardless of how many shares were issued at the lower price. This is extremely punitive for founders: if one share is sold in a down round at a 90% discount, all of the investor's preferred converts at 10% of the original price. Full ratchets were common in the dot-com era and resurface in severe down rounds where investors have maximum leverage. They're considered a highly unfavorable, founder-hostile term. Weighted average anti-dilution is the fair market alternative.
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Frequently Asked Questions
What is Ratchet in venture capital?
A ratchet (or full ratchet anti-dilution) is the most aggressive form of anti-dilution protection. If a company issues a single share at a lower price than the investor paid, the ratchet resets the investor's entire conversion price to that lower price — regardless of how many shares were issued at...
Why is Ratchet important for startups?
Understanding 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 Ratchet fall under in VC?
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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