In the previous post, we had touched upon anti-dilution right. In this post, we will discuss Full-ratchet anti-dilution.

Let us consider that the company is in a Series A fundraising negotiation. A full-ratchet means that if in the future, the company issues new shares at a price below the Series A, the Series A price would be reduced to the lower price. So if the company issues one share at a lesser price, then all the Series A gets re-priced and hence the ownership will change.

For example, the company had 1M shares at a price of $10 per share. Now if you issue a 1M share in series A at a price of $10 representing an investment of $10M, then the investor will hold 50% of the company. If the series A gets re-priced to $9 in the future, the investor would now hold 1,111,111 shares, and the new ownership for the founders would be 47% (1,000,000/2,111,111).

Also, a real-life example of the full ratchet is the Square IPO in which the Series E investors were issued additional shares because the IPO price was less than the price paid by the investors in the earlier round. Box had a similar ratchet in place. It’s increasingly common in mega-rounds to build in protections such as IPO ratchets.

Usually, companies try to get the unicorn or higher valuation and investors get some downside protection. In the next post, we will talk about a strategy that is more friendly to the founders: weighted average adjustment.