What is full ratchet anti-dilution?
Full ratchet is the harshest anti-dilution formula: if the company later issues shares at a price below what an investor paid, that investor’s conversion price resets to the new, lower price — as if they had invested at the down-round price all along, regardless of how small the new issuance is.
Full ratchet vs. weighted average, in one example
Investor A paid $10/share for 10% of the company. The company later raises a small bridge at $5/share. Under full ratchet, A’s conversion price halves to $5 — doubling the shares A converts into, with the dilution landing almost entirely on founders and employees. Under broad-based weighted average, the adjustment reflects the size of the cheap issuance; a small bridge moves the price a few percent, not 50%. That is why weighted average is the market standard and full ratchet survives mainly in distressed financings and aggressive bridge terms.
What founders should do when they see it
Three moves. Negotiate down to broad-based weighted average — in a competitive round this usually succeeds. If ratchet is the price of the money, cabin it: sunset after 12–24 months, carve-outs for the option pool, strategic issuances and permitted equity, and a cap on total adjustment. And model it before signing: a founder who cannot state what a 40% down round does to their table under the clause has not read the term sheet. In Turkish structures the mechanism is implemented through conversion or bonus-share mechanics that must be pre-wired in the articles — another reason not to accept it casually.
Does full ratchet ever protect founders?
No — it exists to shift down-round risk from one investor class onto everyone else; its only founder-side use is as a bargaining chip to trade away.
Is a ratchet the same as an IPO ratchet?
Related but distinct: IPO ratchets guarantee late-stage investors a minimum IPO return via extra shares — same instinct, different trigger.
Related: structured equity.