Exits & Liquidity
Ratchet IPO
An IPO where late-stage investors have contractual protections guaranteeing minimum returns, shifting downside risk to earlier investors and founders.
A ratchet IPO occurs when late-stage investors have negotiated anti-dilution ratchets or IPO price guarantees that protect them from going public at a valuation below their investment price. If the IPO prices below the trigger, additional shares are issued to the protected investors, diluting everyone else. This creates a situation where the company can technically go public but the ratchet provisions make it economically punishing for common shareholders.
In Practice
The unicorn's Series F investors had a full ratchet IPO protection: if the company went public below $50/share (their entry price), they would receive additional shares to maintain their original value. When the IPO priced at $35/share, the ratchet triggered a 43% dilution for all other shareholders.
Why It Matters
Ratchet IPOs expose the hidden costs of aggressive late-stage term sheets. Founders who accept ratchet provisions during private rounds may find that their IPO is economically devastating for early employees and investors if the public market doesn't validate private-round prices.
VC Beast Take
Ratchet IPOs became more visible after several high-profile unicorn IPOs in 2019-2020 where late-stage ratchets triggered massive dilution. They're a cautionary tale about the long-term consequences of accepting aggressive terms to maintain high private valuations.
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