Broad-Based Weighted Average Ratchet

AAA

DEFINITION of 'Broad-Based Weighted Average Ratchet'

A mechanism seen in early-stage, pre-public companies in response to a subsequent round of financing that involves issuing shares at a lower price than first-stage investors received. A broad-based weighted average ratchet almost always involves preferred stock, in which early investors have a conversion price ("price X"), while a later round of investors receive preferred shares with a lower conversion price ("price Y"). A weighted average price is calculated that will effectively reprice the shares issued at price X and price Y to the value of:

[(Price X) * (shares issued at Price X)] + [(Price Y) * (shares issued at Price Y)] / Total Outstanding Shares on a Fully Diluted Basis

INVESTOPEDIA EXPLAINS 'Broad-Based Weighted Average Ratchet'

The company issuing the shares would prefer to not make any adjustments to preferred shares with higher conversion prices, but most venture-capital groups and investors will insist on a clause that protects their interests in the event that a lower round of financing (also called a "down round") occurs in the future.

In a broad-based ratchet, all rights of ownership (real or potential) are counted in the denominator of "total shares", whether they are preferred or convertible shares, warrants, or options. In a narrow-based ratchet, only common stock outstanding is used to compute the weighted-average price of shares to all investors.

RELATED TERMS
  1. Convertible Preferred Stock

    Preferred stock that includes an option for the holder to convert ...
  2. Venture Capital

    Money provided by investors to startup firms and small businesses ...
  3. Angel Investor

    An investor who provides financial backing for small startups ...
  4. Liquid Asset

    An asset that can be converted into cash quickly and with minimal ...
  5. Common Stock

    A security that represents ownership in a corporation. Holders ...
  6. Exchange Traded Derivative

    A financial instrument whose value is based on the value of another ...
RELATED FAQS
  1. What is the difference between in the money and out of the money?

    In options trading, the difference between "in the money" and "out of the money" is a matter of the strike price's position ... Read Full Answer >>
  2. If a long call is owned on the record date of a stock, is the owner of the option ...

    The owner of a long call for a stock is entitled to a dividend only if the option is exercised prior to the ex-dividend date, ... Read Full Answer >>
  3. How can an investor profit from the cyclical nature of the electronics sector?

    An investor can profit from the cyclical nature of the electronics sector in two ways. He can employ sector rotation, shifting ... Read Full Answer >>
  4. What does negative vega mean for credit spreads?

    Greek vega measures an option's sensitivity with respect to a change in the underlying asset's volatility. The vega of an ... Read Full Answer >>
  5. What options strategies are best suited for investing in the banking sector?

    The covered call option strategy allows investors to profit from the banking sector's stability and its track record for ... Read Full Answer >>
  6. What options strategies are best suited for investing in the drugs sector?

    The covered call and long straddle options strategies enable investors to capitalize on the unique characteristics of the ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    A Primer On Preferred Stocks

    Offering both income and relative security, these uncommon shares may work for you.
  2. Bonds & Fixed Income

    Introduction To Convertible Preferred Shares

    These securities offer an answer for investors who want the profit potential of stocks but not the risk.
  3. Investing Basics

    IPO Lock-Ups Stop Insider Selling

    Ownership plays a key role when companies go public. Find out how.
  4. Options & Futures

    SEC-Regulated Options Brokers

    Investopedia provides a List Of SEC-Regulated Options Brokers
  5. Investing Basics

    What are Ordinary Shares?

    Ordinary shares are any type of shares that are not preferred and don’t pay any type of predetermined dividend amount.
  6. Options & Futures

    How To Trade Orange Juice Options

    How do orange juice options work and which factors determine the orange juice valuations? Here's a sneak peak into the world of orange juice options.
  7. Fundamental Analysis

    Explaining the Geometric Mean

    The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment or portfolio.
  8. Investing Basics

    What is Capital Stock?

    Capital stock refers to the number of authorized shares a corporation may issue, both common and preferred.
  9. Mutual Funds & ETFs

    Pros and Cons: Preferred Stock ETFs vs. Bond ETFs

    A look at the differences between preferred stock ETFs and bond ETFs and when you should invest in one over the other.
  10. Options & Futures

    Why Is Best Buy Stock So Volatile?

    We look at why BBY has been so volatile in the past and whether this trend is likely to continue or abate in the future.

You May Also Like

Hot Definitions
  1. Geometric Mean

    The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment ...
  2. Fisher Effect

    An economic theory proposed by economist Irving Fisher that describes the relationship between inflation and both real and ...
  3. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  4. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  5. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  6. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
Trading Center