Full ratchet
Also called: full-ratchet anti-dilution, full ratchet reset
The strongest form of price-reset protection, where a warrant or convertible's price drops all the way to the price of any later, cheaper issuance, however small that issuance is.
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How it works
Under a full ratchet, if the company issues even a small number of shares at a price below the protected security's current exercise or conversion price, that price is reduced to the lower issue price. The size of the new issuance does not matter, unlike a weighted-average ratchet, which moves the price only in proportion to how many new shares are sold.
Agreements often pair the price reduction with an increase in the number of shares the warrant covers, so the aggregate exercise price stays constant.
Worked example
Hypothetical comparison for Company X, which has 20,000,000 shares outstanding and 2,000,000 warrants at $3.00. It then sells 1,000,000 shares at $1.50.
| Formula | New exercise price | Warrant shares |
|---|---|---|
| Full ratchet with share adjustment | $1.50 | 4,000,000 |
| Broad-based weighted average (approximate) | $2.93 | 2,000,000 |
All figures are hypothetical; the weighted-average figure uses the common formula NCP = OCP × (A + B) ÷ (A + C), with A = 20,000,000 shares before the deal, B = shares the new money would have bought at $3.00 (500,000) and C = shares actually issued (1,000,000).
The full ratchet halves the exercise price and doubles the warrant overhang; the weighted average barely moves.
Why it matters
A full ratchet can make any future discounted raise expensive for existing holders, and it can encourage further price-sensitive dealmaking. It is one of the features associated with toxic financing.
How to spot it
Read the "Subsequent Equity Sales" or anti-dilution section in the warrant or certificate of designation. Language such as "the Exercise Price shall be reduced to equal the New Issuance Price" signals a full ratchet. Carve-outs (for example for employee equity plans) matter, so read the definition of "Exempt Issuance". See Resets and ratchets.
Related terms
Guides that use this term
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Toxic Convertibles Explained, From Variable Conversion Prices to No Floor
How variable-price convertible notes work, why a discount to VWAP and a lookback window matter, and what happens to share counts when there is no floor.
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Resets and Ratchets: How Anti-Dilution Clauses Multiply Share Counts
Full-ratchet and weighted-average anti-dilution explained, with a worked share-count table as the price falls from $1.00 to $0.10.