Full Ratchet
Also known as Full Ratchet Anti-Dilution, Full-Ratchet Protection
Full ratchet is the most aggressive form of anti-dilution protection. When the company issues new shares at a price below an investor's conversion price, the investor's conversion price resets all the way down to the new issue price, regardless of the size of the dilutive round. The result is significantly more common shares on conversion at the expense of founders and other unprotected holders.
Formula
New Conversion Price = Lower of (Old Conversion Price, New Issue Price)- Old Conversion Price
- Conversion price of the protected series before the dilutive issuance
- New Issue Price
- Price per share of the dilutive issuance
In depth
Full ratchet is anti-dilution stripped of any weighting. The conversion price resets to the new issue price, and that is the entire calculation. There is no denominator counting outstanding shares, no weighting for the size of the dilutive round. One share issued at half the conversion price has the same effect as 10 million shares issued at that price.
The mechanics: if an investor bought 1,000 preferred shares at $10 (conversion price $10), and the company later sells stock at $5 in a down round, the conversion price resets to $5, and the preferred now converts into 2,000 shares of common (1,000 × $10 / $5). The investor doubles their common position without writing any new check.
Why it matters
Full ratchet is a cap-table accelerant. A founder modeling Series B economics needs to understand whether the Series A had full ratchet, because a 50% Series C down round can transfer 15-25 points of fully diluted ownership from common to the Series A in one event. That common loss is permanent and affects every subsequent waterfall. Lead investors in the new round frequently demand that legacy full ratchet be repriced or eliminated as a closing condition, sometimes via a pay-to-play that strips protection from non-participating holders.
Worked example
Side-by-side comparison of full ratchet versus broad-based weighted average. Starting cap: 4M Series A preferred at $5.00 (conversion price $5.00), 6M common, 2M option pool (12M fully diluted total). New Series B: 2M shares at $2.50 ($5M raised).
| Anti-dilution method | New Series A conversion price | Series A converts to | Extra common shares | Founder dilution impact |
|---|---|---|---|---|
| Broad-based weighted average | $4.64 | 4,310,000 | 310,000 | Minor |
| Full ratchet | $2.50 | 8,000,000 | 4,000,000 | Severe |
Full ratchet conversion:
Shares per preferred = $5.00 / $2.50 = 2.0
Series A common-equivalent = 4,000,000 × 2.0 = 8,000,000
Versus original 4,000,000 common-equivalent → 4,000,000 extra shares
That 4M extra shares is 13x the dilution that broad-based weighted average produced for the same round. The Series A investor recovers their entire price exposure to the down round; founders and employees absorb 100% of it.
Frequently asked
Why is full ratchet so rare?
It is brutally punitive to founders. A modest down round at half the previous price doubles the protected investor's common share count regardless of how few shares were actually sold at the lower price. Most sophisticated investors decline to ask for full ratchet because they know the next round's lead investor will refuse to invest behind such a destabilizing cap table term. Cooley GO notes broad-based weighted average is far more common in US venture deals.
When does full ratchet show up in practice?
Distressed or insider-led rounds where the new investor has unusual leverage, certain bridge financings where the investor anticipates a near-term flat or down round, and some non-US jurisdictions where it is more market. It also appears for short windows (often 12-24 months from closing) as a compromise between full ratchet forever and weighted average from day one.
Does full ratchet apply to small issuances?
Yes, that is the defining feature. A single share issued below the conversion price could in principle trigger the full reset. In practice, the Certificate of Incorporation carves out routine issuances (option pool grants, M&A consideration, conversions) so the trigger requires a true new financing round. Without robust carve-outs, full ratchet is a landmine.
How does full ratchet interact with conversion?
It only matters if the holder actually converts. A preferred investor whose preference exceeds their as-converted value still takes the preference. Full ratchet matters most at intermediate exit valuations where the holder is on the boundary between taking preference and converting, and the ratchet shifts the breakeven dramatically in the holder's favor.