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.

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