Why full ratchet matters to a first-time founder
The clause can transfer substantial ownership from founders and ordinary shareholders to protected investors after a down round. Unlike a weighted-average adjustment, it may ignore how few cheaper shares were issued. Understanding the cap-table effect before signing is easier than trying to renegotiate during a cash crisis.
Examples of full ratchet
An investor’s preferred shares convert at ₹200 per ordinary share. The company later issues new shares at ₹100. A full-ratchet clause resets the protected conversion price to ₹100, so the investor receives twice as many ordinary shares on conversion, subject to the agreement’s exact terms.
Common misunderstanding
It does not stop economic dilution or guarantee the investor’s original valuation. It changes the conversion calculation after a qualifying cheaper issue. Weighted-average anti-dilution also considers the size of the new issue, while full ratchet generally applies the new lower price regardless of that issue’s size.
When to use it
Review it during a priced funding round and model several down-round scenarios on the fully diluted cap table. Check exclusions for employee options, conversions and strategic issuances. Founders should obtain legal advice and negotiate the formula before signing; this is not a term to interpret from a summary alone.