Ratchet

A provision often found in a terms sheet. A ratchet gives an investor certain rights especially when additional equity capital is raised in a "down-round", i.e. at a lower valuation than before. Examples of these terms include so-called "full ratchet" anti-dilution adjustments, super-multiple participating liquidation preferences and short-time frame mandatory redemption. With respect to anti-dilution protection, investors may require an adjustment to the number of shares they purchased previously in the event the company sells additional shares in the future at a price per share lower than the share price paid by the institutional investor. This can occur through an adjustment to the conversion price of the convertible equity security purchased by the investor, i.e. lowering the conversion price so the investor is entitled to more shares when he converts.