What is Full Ratchet?
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 had 10M shares in total, the Series A investor moves from 10% to about 18% (2M of 11M shares) 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
Under broad-based weighted average, the adjustment reflects the size of the cheap issuance: a small bridge moves the conversion price by a few percent, not 50%. Full ratchet ignores size: issue a single share cheaply and the entire protected series reprices as if it had invested at that price. That is why broad-based weighted average is the market standard and full ratchet survives mainly in distressed financings and aggressive bridge terms.
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.
Full ratchet in the modern market
Full-ratchet anti-dilution reprices every protected share to the down round’s lowest price regardless of size: issue one share cheaply and the entire series converts as if it bought there. That severity is why broad-based weighted average displaced it as the market standard, and why ratchet reappears only at leverage points: structured late-stage rounds and IPO ratchets guaranteeing listing returns. When confronted with one, the softening levers are known: time limits, pay-to-play conditions, exemption baskets (ESOP, conversions, strategic issuances), and caps on the adjustment. In Turkish joint stock companies there is no conversion-price mechanism in the US sense: the adjustment is usually delivered by issuing new shares to the investor at nominal value (with pre-emption rights restricted under TTK art. 461) or by share transfers from the founders, because bonus shares issued from internal resources go to all shareholders pro rata under TTK art. 462. Model the mechanics against TTK capital procedure before promising the formula.
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, contain it: a sunset after 12-24 months, carve-outs for the option pool, strategic issuances and permitted equity, a pay-to-play condition and a cap on the total adjustment. And model it before signing: a founder who cannot state what a 40% down round does to their cap table under the clause has not really read the term sheet. In Turkish structures the mechanism must be pre-wired in the articles of association and the shareholders’ agreement: 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: an IPO ratchet guarantees late-stage investors a minimum IPO return through extra shares: the same instinct, a different trigger.
Sources. Turkish Commercial Code No. 6102. Statute links open the official consolidated Turkish texts on mevzuat.gov.tr.