Full ratchet anti-dilution

Full ratchet anti-dilution is the most protective — and most founder-unfriendly — anti-dilution mechanism available to investors. Upon a down round, it recalculates the investor's conversion price to the new, lower share issuance price, regardless of the volume issued at that price. This effectively compensates the investor as if they had originally invested at the lowest price, converting additional shares to compensate for the price differential. In fundraising negotiations, full ratchet is standard in distressed situations but increasingly replaced by the more balanced broad-based weighted average mechanism.

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Example: an investor holds shares acquired at CHF 200. A down round prices new shares at CHF 80. With full ratchet, the investor's conversion price resets to CHF 80 — entitling them to additional shares as if their entire investment had been made at CHF 80. On a CHF 2.0 million investment: original shares = 10,000; at CHF 80 conversion price, adjusted entitlement = 25,000 shares. The 15,000 additional shares come at the direct expense of founders and other shareholders.

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Hectelion models the dilutive impact of full ratchet provisions and advises on negotiating more balanced anti-dilution mechanisms in fundraising transactions.