Ratchet (Full) Dilution
The term ‘full ratchet’ refers to the contractual provision that prevents the dilution of an early investor by future rounds of fundraising. It typically also provides protection against a drop in the strike price, should the pricing of future rounds be lower than that of the initial round. Full ratchet provisions can be extremely dangerous for early stage companies, as they force the company to continue to raise at higher rounds, while simultaneously not allowing the investor to be diluted.
Before you sign a term sheet it is imperative that you understand the rights that your potential investors expect—do not agree to terms that you do not understand or have not discussed with your council. The last thing you want to have happen is you are raising a round of capital and the investor demands that they not be diluted or you have a down round and they expect their original shares to convert at the new (and lower) price.
Ratchet (Partial, Weighter) Dilution
The term ‘partial ratchet’, also known as a ‘weighted ratchet’ refers to the contractual provision that prevents the dilution of an early investor by future rounds of fundraising, and comes in two varieties: the narrow-based weighted average, and the broad-based weighted average. In either case, it takes into account the number of shares that are issued in the next dilutive financing round and the price is adjusted accordingly. The weighted/partial ratchet is a compromise to ensure that the early-stage investors maintain their benefits for getting in early, while simultaneously being a bit more friendly to the founders of the business.
Before you sign a term sheet it is imperative that you understand the rights that your potential investors expect—do not agree to terms that you do not understand or have not discussed with your council.
The term ‘recapitalization’ refers to the process of restructuring a company’s debt and equity stack, to stabilize their capital structure. It is typically invoked when there is a drop in a company’s share price, or when the company attempts to defend against a hostile takeover, or bankruptcy, and involves the exchange of one form of financing for another.
Receivables factoring, also known as accounts receivable factoring, is a type of alternative financing in which a company sells its receivables (invoices) to a third party at a discount to raise capital. It’s similar to receivables financing, in that businesses can unlock capital today by tapping into their future accounts receivables, however, the key difference lies in the underwriting process and the collateral that is required.
Receivables financing is a form of non-dilutive funding that allows startups to collateralize their future accounts receivables to receive capital today. This type of financing can be used to fund operating expenses, hire new employees, expand into new markets, and much more.
The term ‘recurring revenue’ is related to the revenue model that a company employs for its products or services. When a product or service requires that it continually be paid for (such as a software subscription), it is said to generate recurring revenue for the business. Businesses that typically have a recurring revenue model include software startups and SaaS businesses.
Businesses that have a recurring revenue model are the perfect fit for revenue-based financing.
Recurring Revenue Lending
A recurring revenue loan is a type of debt-financing that is especially popular for software and SaaS businesses where they have a predictable stream of revenue. The loan amount is based on the size and nature (e.g. monthly or annual frequency) of the revenue stream. Recurring revenue loans are similar to revenue based financing (RBF) options, except that the receivables financing type of RBF is not considered a loan and does not carry interest.