Full-Ratchet Anti-Dilution

Full-ratchet anti-dilution is the punitive flavor that resets the preferred conversion price to the new lower price in any down round, regardless of round size. It produces massive dilution of common stock and founders even for relatively small down-round capital, with modern usage largely limited to distressed financings, aggressive structured deals, and down rounds where the new investor has significant leverage. It is the term sheet flag founders should generally treat as a deal-breaker and only accept when the alternative is no deal at all.

The full-ratchet mechanic:

• Trigger: any issuance of new stock at a price below the prior preferred series' conversion price (with carve-outs for option pool, M&A, partnerships, and pre-existing convertibles).
• Adjustment: the prior preferred series' conversion price resets to the new (lower) price. No formula, no weighting, no proportionality to the size of the dilutive issuance.
• Effect: the prior preferred series now converts at the new lower price, gaining many more common shares per preferred share. This dilutes common stock and founders proportionally.

Concrete example: company has 10M shares outstanding at Series A conversion price of $10/share. Series B raises $1M (just $1M!) at $5/share, issuing 200K new shares.

• Under weighted-average: Series A conversion price adjusts from $10 to roughly $9.90 (very small adjustment because the down round is small).
• Under full-ratchet: Series A conversion price resets to $5 (full reset to new lower price). Series A's effective share count doubles. Founders and common holders are massively diluted to compensate.

The asymmetry is brutal: the same small $1M down round produces a tiny adjustment under weighted-average and a catastrophic adjustment under full-ratchet. The math gets worse as more rounds happen: full-ratchet typically applies to each series independently, so a series with full-ratchet that gets triggered by a small down round may then itself produce subsequent adjustment events for earlier series. The cascade can wipe out founder and common ownership in distressed scenarios.

When full-ratchet shows up:

• Distressed financings: when the company has limited alternatives, new investors may demand full-ratchet as part of the deal package.
• Recapitalizations: when the company needs to wipe out prior preferred to make new investment possible, full-ratchet against existing investors is often part of the structure.
• Aggressive structured deals: hedge funds and other non-traditional venture investors sometimes propose full-ratchet on otherwise market terms.

The negotiating reality: in standard venture rounds, full-ratchet is non-market and should be flatly rejected. In distressed situations, full-ratchet may be the price of survival, but founders should still push to convert it to weighted-average if any negotiating leverage exists. The right alternative is broad-based weighted-average with carve-outs.

What founders get wrong: Accepting full-ratchet because they're confident they'll never raise a down round, or accepting it as part of a "small concession" in negotiation. The point of anti-dilution provisions is to govern the scenarios you're hoping to avoid. Most founders who eventually take a down round were confident at the prior round they wouldn't. Full-ratchet is the term that bites hardest when the worst case shows up. The right discipline: insist on weighted-average (broad-based) at every priced round, never accept full-ratchet in standard rounds, and model the math explicitly if full-ratchet is on the table in a distressed scenario so you understand what you're signing.

Related: Anti-Dilution Provisions · Weighted-Average Anti-Dilution · Broad-Based Weighted-Average · Preferred Stock · Down Round

FAQ

What is full-ratchet anti-dilution?
The most punitive flavor of anti-dilution protection in preferred stock, resetting the conversion price of the preferred series all the way to the new (lower) price when the company issues stock at a price below the prior preferred price, regardless of the size of the dilutive issuance. Produces massive dilution of common stock and founders.

How does full-ratchet differ from weighted-average?
Full-ratchet resets the entire conversion price to the new price (no proportionality to round size); weighted-average produces a partial adjustment based on the size of the down round relative to the total cap table. A small down round produces a tiny adjustment under weighted-average and a catastrophic adjustment under full-ratchet.

When should I accept full-ratchet?
In standard venture rounds, never (it's non-market and should be rejected). In distressed financings where survival is at stake and the alternative is no deal, full-ratchet may be the price of capital, but push to convert it to weighted-average if any negotiating leverage exists. Model the math explicitly before signing.