Full ratchet is the strongest anti-dilution mechanism in preferred stock—it resets an earlier investor’s effective purchase price to match any lower price in a future financing.

How it works

Imagine an investor bought preferred at $1.00 per share. A later down round prices shares at $0.50. Under full ratchet, that investor’s conversion price drops to $0.50, doubling the shares they receive on conversion as if they had invested at the new low. Other shareholders—founders, employees, and later investors without similar protection—absorb most of the dilution. Full ratchet applies to the specific series that holds it, not necessarily every investor. Weighted-average anti-dilution, by contrast, blends old and new prices based on how much stock was sold at the lower price, producing milder adjustments.

Why it matters

• Founders: Push back hard on full ratchet in term sheets. Even one protected series can make future down rounds punitive and demoralize the team.
• Investors: Some distressed or late-stage investors demand full ratchet for downside protection; lead VCs in healthy rounds rarely accept it because it poisons cap table dynamics.

Common mistake

Assuming all anti-dilution clauses work the same. Broad-based weighted average is common and negotiable; full ratchet is a different animal and should be flagged immediately in diligence.

Related ideas

Weighted-average anti-dilution, down round, pay-to-play, and fully diluted share counts after repricing.