Anti-Dilution (Full Ratchet)

Also called: Full ratchet anti-dilution

TL;DR

The most aggressive anti-dilution provision: in a down round, prior preferred holders' conversion price ratchets down to the new round's price.

Full ratchet anti-dilution recalculates a prior round's effective price as if the round had happened at the new (lower) price per share. A Series A investor who paid $10/share would, after a full-ratchet adjustment to a $5/share down round, have their conversion price reset to $5, effectively doubling their share count.

Full ratchet is the most punitive form of anti-dilution and is rare in modern term sheets. Weighted-average anti-dilution is the standard. When full ratchet does appear, it typically signals a hard-fought negotiation in a difficult market.

Worked example

Series A invested $5M at $2.00/share. A down-round Series B prices at $1.00/share. Full-ratchet anti-dilution lets Series A re-price every share to $1.00 → effectively doubles their share count, deeply diluting common, which is why full ratchet is rare.

Common pitfalls

•Accepting full ratchet without modeling the dilution impact of a future down round.
•Stacking full-ratchet provisions across multiple rounds.
•Failing to negotiate a 'pay-to-play' carve-out alongside ratchet protection.

When this shows up in a pitch deck

Term-sheet detail, not deck content.

Related terms

Anti-Dilution (Weighted Average)

A standard anti-dilution provision that adjusts a prior preferred holder's conversion price using a formula weighted by the size of the down round.

Down Round

A funding round priced at a lower valuation per share than the previous round, typically triggering anti-dilution adjustments and signaling stress.

Preferred Stock

The equity class issued to investors, carrying special rights such as liquidation preference, anti-dilution protection, and protective covenants.

Term Sheet

A non-binding document outlining the principal terms of a proposed financing, used to align investor and founder before legal documents are drafted.

Liquidation Preference

The right of preferred shareholders to be paid a defined amount before common shareholders receive any proceeds in a liquidation event.

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