Why it matters
Ratchets transfer the entire risk of a flat or down round from the investor to the founder. In a real-world example: VC invests $5M at $20M post-money for 25%. You raise next round at $15M post-money. With a full ratchet, the VC's stake is recalculated as if they paid the new price — which can multiply their ownership and decimate yours. Broad-based weighted average is the market-standard alternative and it is materially fairer.
How to negotiate
Counter with broad-based weighted average anti-dilution. If they refuse, propose a narrow-based weighted average as a fallback. A full ratchet should never appear in a primary round at seed or Series A. If it does, the firm is signalling either inexperience or predatory intent — neither is a partner you want.
Example language
How this clause typically appears in a term sheet. Read it carefully — predatory language is often buried in routine paragraphs.
In the event the Company issues additional securities at a price per share less than the conversion price then in effect, the conversion price shall be reduced to such lower price, on a full-ratchet basis.
TURNSHEET provides intelligence, not legal advice. This page describes typical market behaviour and common negotiation tactics; your specific deal may have nuances that change the analysis. Always review your term sheet with qualified legal counsel before signing.