Full Ratchet
Full Ratchet, a form of Anti Dilution Protection, acts as a robust shield against ownership dilution for early investors in a startup. This mechanism ensures that if a subsequent fundraising round results in a reduced ownership percentage for existing investors due to newly issued shares, these investors have the right to adjust their Conversion Ratio and maintain their original ownership level.
What it Means:
In the dynamic world of Indian startups, Full Ratchet provides a safety net for early backers. It reflects a commitment to preserving the value of initial investments by adjusting the conversion terms, specifically the ratio of preferred shares to common shares, in response to any subsequent funding at a lower valuation.
How to Calculate:
The Full Ratchet mechanism recalculates the Conversion Ratio based on the lowest price per share at which the startup later issues its stock. The formula involves adjusting the ratio to mirror the number of common shares an investor would have received at the lowest subsequent price, irrespective of the quantity sold at that price.
Why Measure:
For Indian founders navigating the complexities of fundraising, Full Ratchet serves as a critical tool to maintain investor confidence. By mitigating the impact of dilution on early investors, it fosters trust and incentivizes continued support. Measuring the effectiveness of Full Ratchet reflects a commitment to equitable partnerships and investor-friendly practices.
Examples:
Imagine an Indian startup, TechInnovate, which initially issued preferred shares to an investor at INR 20 per share. In a subsequent round, TechInnovate faces a funding challenge, resulting in a new issuance of common shares at INR 10 per share. With Full Ratchet protection, the investor's preferred shares would now convert at a ratio ensuring they receive the equivalent of ten common shares for every preferred share, despite the lower valuation.
This real-life scenario illustrates how Full Ratchet safeguards early investors in the Indian startup ecosystem, preserving their ownership stake even in the face of funding rounds at diminished valuations.
In summary, Full Ratchet emerges as a strategic ally for Indian founders and investors alike, fostering an environment of trust, fairness, and long-term collaboration in the ever-evolving landscape of startup finance.