TLDR:
Full ratchet is the most investor-protective anti-dilution provision, adjusting the conversion price of existing preferred shares to match the lowest price of any new shares issued in a down round.
Full Ratchet in Practice — A Numerical Example
Suppose an investor converts $1M of Series A preferred at $1.00/share (1M shares). The company then raises a down round at $0.50/share (full ratchet triggers). The investor’s new conversion price becomes $0.50, meaning their $1M investment now converts at $0.50/share — doubling their share count to 2M shares. This aggressive adjustment severely dilutes founders and common shareholders. If the company has 10M total shares, the Series A investor moves from 10% to 20% ownership at the expense of all other holders, which is why full ratchet provisions are strongly resisted by founders and their counsel.
Why Weighted Average Is Almost Always Better
When Full Ratchet Appears
Full ratchet anti-dilution is most often seen in distressed financings, bridge rounds, or transactions involving sophisticated investors with significant leverage over founders. It also appears in some convertible-debt structures where investors negotiate strong downside protection. Modern venture financings overwhelmingly use weighted-average anti-dilution (broad-based or narrow-based) rather than full ratchet, reflecting market evolution toward more balanced founder-investor economics. Founders facing demands for full-ratchet anti-dilution should carefully evaluate alternatives — even small differences in anti-dilution structure can materially affect founder economics in down-round or recapitalization scenarios.