Today's word: FULL RATCHETTheme for this fortnight: VENTURE CAPITAL
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.
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.