What is full ratchet anti-dilution and why is it rarely used?
Short Answer
Full ratchet anti-dilution reprices an investor's shares downward if future rounds occur at lower valuation, effectively punishing the company for any down round.
Full Explanation
Full ratchet anti-dilution reprices an investor's shares downward if future rounds occur at lower valuation, effectively punishing the company for any down round.
In a full ratchet scenario: an investor buys 1M shares at £2 (Series A at £2M pre-money). If Series B prices at £1, full ratchet automatically reprices the Series A down to £1, meaning the investor now holds 2M shares. This is extremely punitive to founders because it can double or triple an early investor's ownership without additional capital. For example, Series A might go from 10% to 20% ownership through a full ratchet repricing. Full ratchet became notorious in the dot-com era and is now considered founder-hostile and red-flag territory. Most professional investors explicitly accept broad-based weighted-average anti-dilution instead, which reprices only partially. Full ratchet is occasionally found in seed deals with unsophisticated angels or in founder-friendly deals where the investor is negotiating from weakness. For startups, accepting full ratchet from one investor creates serious problems: future investors will demand compensation for the distorted cap table, and the original investor has a strong incentive to fight future fundraising to avoid being diluted themselves.
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Further Reading
What is a down round and how does it affect founders?
A down round is a funding event where the company's valuation is lower than the previous round, signalling market concerns and potentially triggering anti-dilution consequences for founders.
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