Full Ratchet

DEFINITION of 'Full Ratchet'

An anti-dilution provision that, for any shares of common stock sold by a company after the issuing of an option (or convertible security), applies the lowest sale price as being the adjusted option price or conversion ratio for existing shareholders.

BREAKING DOWN 'Full Ratchet'

Full-ratchet anti-dilution protection allows an investor to have his or her percentage ownership remain the same as the initial investment.

For example, an investor who paid $2 per share for a 10% stake would get more shares in order to maintain that stake if a subsequent round of financing were to come through at $1 per share. The early round investor would have the right to convert his shares at the $1 price, thereby doubling his number of shares.

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