Ratchet Clause
Also called: Full Ratchet Anti-Dilution · Ratchet Anti-Dilution Provision
A ratchet clause is a specific, aggressive form of anti-dilution protection that adjusts an investor's conversion price to match a later, lower-priced round entirely — rather than a weighted-average adjustment that accounts for how much new stock was actually issued. It's far more protective of the investor, and far more dilutive to founders, than the weighted-average alternative.
In more detail
The difference from ordinary (weighted-average) anti-dilution is significant: weighted-average adjustment considers both the lower price and the amount of new stock issued at that price; full ratchet ignores the amount entirely and simply reprices the investor's entire stake as if the whole round had happened at the new, lower price.
A single small down round can trigger dramatic additional dilution to founders and other shareholders under a full ratchet provision, compared to the more proportionate effect of weighted-average anti-dilution — which is why full ratchet is far less common in founder-friendly financing rounds.
Full ratchet terms are typically only accepted by founders in weaker negotiating positions, or included as a specific protection for a lead investor in an otherwise standard weighted-average round.
An investor holds shares that convert at ₹100 per share under full ratchet anti-dilution. If the company later raises a round at ₹40 per share — even for a small amount of new stock — the investor's entire existing stake reprices to convert at ₹40, causing dramatically more founder dilution than a weighted-average formula would.
What our lawyers check
- Whether anti-dilution protection is full ratchet or weighted-average
- The dilutive impact modelled against realistic future down-round scenarios
- Whether full ratchet applies to all investors or only a specific lead investor
- Any carve-outs (option pool top-ups, specific approved issuances) excluded from triggering the ratchet
Contracts where this clause matters
Related terms
This definition is general information about commercial contracting practice, not legal advice. How a clause operates depends on the specific wording of your agreement and the law that governs it. For advice on your contract, have it reviewed by a lawyer.
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