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What is a ‘ratchet’ as meant on a VC term sheet?

We recently defined the term “Ratchet” in our Free Startup Law Dictionary.

Ratchet is an anti-dilution mechanism that protects a series of preferred stock by automatically adjusting the conversion price to a lower price in the event that the preferred series was issued at a higher amount.

For example, if the conversion price of Series A Preferred Stock is $1.00 – equal to the initial purchase price per share – and XYZ sells its Series B stock for $0.25 per share, then the Series A conversion price would be adjusted from $1.00 to $0.25.

Read more: https://www.lawtrades.com/resour…

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