What is Full Ratchet Anti-Dilution?
Full Ratchet Anti-Dilution
Full Ratchet Anti-Dilution is an aggressive investor protection clause that adjusts the conversion price of preferred shares to match the lowest share price issued in any subsequent down round.
Why It Matters for Startups
Directly dictates the cap table and dilution structure during fundraising; understanding Full Ratchet Anti-Dilution helps founders model equity distributions when structuring rounds for investor protection drafting in down-round negotiations.
Detailed Deep Dive
Full Ratchet Anti-Dilution is the most investor-friendly anti-dilution mechanism. If a startup issues even a single share at a lower price in a subsequent round, the conversion price of all preferred shares protected by the ratchet is lowered to match, resulting in significant founder dilution.
Frequently Asked Questions
Q:How does Full Ratchet differ from Weighted Average anti-dilution?
Full Ratchet adjusts the conversion price to the lowest new price regardless of how few shares are issued, whereas Weighted Average factors in the volume of new shares issued.
Q:Why is Full Ratchet unpopular with founders?
It causes massive dilution for founders and early employees during down rounds, transferring large amounts of equity to protected investors.
Quick Facts
- CategoryLegal
- Key ApplicationInvestor protection drafting in down-round negotiations
Coverage Trend12 Weeks
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