Ratchet / Full Rachet defined: A rachet provision (usually a “Full-Ratchet” provisions) provides anti-dilution protection to an investor (see PrivCo.com defintion of “anti-dilution”). When a company raises new equity capital such as venture capital, with a Full Rachet provision an investor has the option of having have his or her percentage ownership remain the same as his initial investment. For example, an investor who paid $10 per share for a 20% stake in a private company would get more shares in order to maintain that stake if a subsequent round of financing were to come through at $8 per share. (This is known as a “down round – see PrivCo.com definition of Down Round.”) The earlier round investor would have the right to convert his shares at the $8 per share price as part of the Down Round, increasing his shares by 25% and maintaining his 20% ownership stake in the private company.
Above is a definition for “Ratchet / Full Rachet” from PrivCo’s Private Company Knowledge Bank, the definitive online and e-book guide to private companies and private company deals.
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