---
title: "What Is Ratchet?"
term: "Ratchet"
description: "In venture and PE, a ratchet is a contract mechanism that adjusts investor ownership or conversion price if future financing or performance triggers occur — protecting investors from dilution or valuation drops at founders' expense. Full ratchets are rare today; weighted-average anti-dilution is standard."
date: 2026-07-25T00:00:00.000Z
updated: 2026-07-25T00:00:00.000Z
topics: ["venture-capital"]
source: https://venturecapitaltracker.com/glossary/ratchet
---

# What Is Ratchet?

> In venture and PE, a ratchet is a contract mechanism that adjusts investor ownership or conversion price if future financing or performance triggers occur — protecting investors from dilution or valuation drops at founders' expense. Full ratchets are rare today; weighted-average anti-dilution is standard.

A **ratchet** adjusts investor economics when specified triggers hit — most famously anti-dilution protection when a company raises at a lower price than a prior round.

## How it works

A **full ratchet** reprices earlier preferred as if it had invested at the new lower price — maximally punitive to common. **Weighted-average** ratchets (broad-based or narrow) blend old and new prices by shares outstanding — standard in NVCA docs. Other ratchets tie to revenue or IPO valuation milestones, granting extra shares if targets miss. PE earnouts sometimes ratchet purchase price based on post-close performance.

In distressed venture rounds, structured ratchets or pay-to-play packages appear alongside recapitalizations. Modeling tools show how each scenario shifts founder ownership.

## Why it matters

- **Founders:** Negotiate broad-based weighted average; avoid full ratchet unless no alternatives exist.
- **Investors:** Ratchets protect prior money in down scenarios but can destroy alignment if too harsh.
- **Employees:** Option pools dilute further when ratchets fire — refresh grants may lag reality.

## Common mistake

Ignoring anti-dilution until a down round. Founders discover prior Series A language converts paper wealth to near-zero common overnight.

## Related ideas

Anti-dilution, [/glossary/down-round](/glossary/down-round), pay-to-play, and recapitalization.

## FAQ

### What is a ratchet in simple terms?

It is a deal term that automatically gives investors extra shares or a better price if something bad happens later — like a lower valuation round — so their stake does not shrink as much as it otherwise would.

### Why does a ratchet matter?

Aggressive ratchets can wipe common shareholders in a down round. Founders and early employees should model anti-dilution before signing preferred terms.


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Source: https://venturecapitaltracker.com/glossary/ratchet