A full ratchet is a provision in certain financial instruments, such as convertible securities or stock options, that protects early investors from dilution in the event of subsequent financing rounds at lower valuations. This provision ensures that early investors maintain their ownership percentage in the company, even if the company issues new shares at a lower price per share.

Here’s how the full ratchet works:

1. **Convertible Securities or Stock Options:**
– The full ratchet provision is commonly found in convertible securities, such as convertible preferred stock, or in stock options that are part of an investment deal.

2. **Conversion Ratio Adjustment:**
– If the company issues new shares at a lower price per share in a subsequent financing round, the full ratchet provision triggers a conversion ratio adjustment for the existing convertible securities or stock options.

3. **Adjustment Calculation:**
– The adjustment is calculated by comparing the new, lower price per share in the subsequent financing round with the original price per share at which the early investors or option holders initially invested. The conversion ratio is adjusted to reflect the decrease in the valuation.

4. **Impact on Ownership Percentage:**
– The result of the adjustment is that the early investors or option holders receive a greater number of shares upon conversion or exercise, thereby maintaining their ownership percentage in the company. The adjustment is designed to offset the dilution caused by the lower valuation in the subsequent financing round.

The full ratchet is a protective measure for early investors, especially in situations where the company’s valuation has decreased since the initial investment. While it provides a significant level of protection for existing investors, it can be perceived as punitive for the founders and later-stage investors in the company.

Other variations of anti-dilution provisions include weighted average ratchets, which provide a more balanced adjustment by taking into account the size of the new financing round, and broad-based ratchets, which include not only the preferred stock but also common stock equivalents in the calculation.

It’s important for both investors and founders to carefully consider the implications of anti-dilution provisions, as they can significantly impact the ownership structure and dynamics within a company. Negotiations around these provisions are common during investment rounds, and the terms can vary depending on the bargaining power of the parties involved.