Meaning
Contractual price adjustment remedies reprice existing preferred stock conversion rates down to the exact price per share of a subsequent lower priced equity issuance. Applying full ratchet anti dilution completely insulates preferred investors from valuation drops by treating every prior share purchase as if bought at the new lower valuation. This investor right operates regardless of how few new shares are issued at the lower price.
The protection stops functioning once preferred stock converts into common stock or when waived by investor vote.
Repricing Calculation
Math formulas under this clause ignore the volume of new equity sold and focus entirely on the lower share price. Activating full ratchet anti dilution reduces the preferred conversion price directly to the down round price, dramatically increasing the number of common shares the preferred holder receives upon conversion. A tiny share sale at a low valuation triggers a complete repricing of the historical investment round.
Founder Dilution
Existing common equity holders face severe ownership reduction when full ratchet mechanisms execute during down rounds. Because full ratchet anti dilution allocates vast share quantities to historical investors, founding teams see their voting power and economic claims diluted heavily. Venture funds sometimes waive these rights to prevent founder demotivation during recapitalizations.
Conversion Shift
Adjusted conversion prices alter equity distribution schedules across all financial projections. Legal counsel verifies calculation accuracy before closing lower priced investment rounds.
