Why it matters
An IPO ratchet promises the investor a minimum return at listing. If the IPO prices below that floor, extra shares are issued to make them whole. The dilution is borne by common holders — founders and employees. The infamous Square IPO showed how brutal this can get: late-stage investors with ratchets received millions of additional shares when the IPO priced below their preferred floor, while founders and earlier investors absorbed the dilution. Ratchets convert a public-market price discovery into a private guarantee, paid by you.
How to negotiate
Reject outright at any stage prior to a true crossover round. If a late-stage investor demands one, the price is a much lower valuation today — IPO ratchets are how investors confess they think your current valuation is inflated. If you must accept, cap the additional shares (e.g. no more than X% additional dilution), exclude small IPOs from triggering, and require a long lookback window before triggering.
Example language
How this clause typically appears in a term sheet. Read it carefully — predatory language is often buried in routine paragraphs.
If the price per share in the Company's initial public offering is less than 1.25× the Series D Original Issue Price, additional shares of Common Stock shall be issued to the holders of Series D Preferred such that the effective price per share equals such floor.
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.