Published on
July 10, 2026
Full Ratchet vs Weighted Average: Key Tradeoffs
How full ratchet and weighted average anti-dilution affect founder dilution, cap tables, and negotiation levers in down rounds.
If you remember one thing, make it this: full ratchet can crush founder ownership, while weighted average usually softens the hit. In a down round, both terms change how preferred shares convert into common shares. But they do not do it the same way.
Here’s the short version:
- Full ratchet resets the old investor price all the way down to the new lower price.
- Weighted average only adjusts part of the way, based on price and round size.
- Broad-based weighted average is usually easier on founders than narrow-based weighted average.
- In Q1 2024, 23% of new venture rounds were down rounds.
- Weighted average appeared in 60% of VC deals in 2023.
So when I look at these clauses, I focus on one question: how much ownership moves if the next round is priced lower?
Full Ratchet vs Weighted Average Anti-Dilution: Key Tradeoffs at a Glance
Anti-Dilution Provisions Explained: How Investors Protect Their Ownership in Startups
Quick Comparison
| Term | How it works | Effect on founders | Common use |
|---|---|---|---|
| Full Ratchet | Resets to the new lower price, no matter how small the round is | Harshest dilution | Distressed or investor-led deals |
| Broad-Based Weighted Average | Partial reset using a larger share count | Lightest hit of the three | Common market default |
| Narrow-Based Weighted Average | Partial reset using a smaller share count | More dilution than broad-based | More investor-friendly deals |
A simple example shows the gap fast. If an investor bought at $10.00 per share and the next round prices at $2.00, full ratchet can turn 100,000 shares into 500,000 shares on conversion. That extra ownership comes from founders, employees, and option holders.
Before signing, I’d model:
- a small down round
- a large down round
- any option pool increase
- and the effect on founder ownership at exit
That turns this from legal wording into plain math. And that’s the part that matters.
Full Ratchet: Maximum Investor Protection, Maximum Founder Dilution
Full ratchet is the most aggressive type of anti-dilution protection. It gives investors the most protection because it resets the conversion price to the lowest price paid in a later round, even if the company sells only a small number of shares in that round.
How the Conversion Price Reset Works in a Down Round
Here’s a simple example. An investor puts in $1,000,000 at $10.00 per share in your Series A and gets 100,000 preferred shares. Later, the company raises a down round at $2.00 per share.
Under full ratchet, that investor’s conversion price resets to $2.00. So on paper, it’s as if they had paid $2.00 per share from the start. Their 100,000 shares now convert into 500,000 shares. That’s a 5x increase in share count.
That extra ownership doesn’t come from thin air. It comes straight out of the ownership held by founders, employees, and option holders. With full ratchet, price is what drives the reset, not round size. That’s why the big thing to watch isn’t just the new price. It’s the formula used to reset the conversion price.
When Full Ratchet Appears in Deals
Full ratchet is fairly rare in typical U.S. venture financings. When it shows up, it’s often in distressed situations: a company that’s having trouble raising money, a high-risk bridge round, or a deal where the investor has a lot of leverage and is focused mainly on downside protection.
In plain English, it tends to appear when the investor holds the stronger hand and founder-friendly terms are not the main priority.
What Founders Give Up Under Full Ratchet
Full ratchet can get expensive fast, and the effects can stack up. As the protected investor’s share count grows, founders and employees take the hit.
A few things often happen:
- Existing options can go underwater, meaning the strike price is higher than the current share value.
- That can hurt morale and lead to refresh grants, which dilute the cap table again.
- A cap table that leans too far in one direction can make the next financing tougher to close.
So the risk shift is pretty stark. Full ratchet pushes almost all down-round pain onto common holders. It protects or even increases investor ownership, cuts into founder and employee equity, and can make future rounds messier.
Weighted average goes after the same anti-dilution goal, but it softens the reset by taking round size into account.
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Weighted Average: Dilution Tied to Round Size
Unlike full ratchet, weighted average adjusts the conversion price only part of the way, based on how large the down round is. The formula is: New Conversion Price = Old Conversion Price × (A + B) ÷ (A + C). Here, A is the total shares outstanding before the new round, B is the number of shares that would have been issued at the old price, and C is the actual number of shares issued in the new round.
Put simply: the larger the down round, the larger the reset. But the hit is still lighter than under full ratchet. That usually means less dilution for founders and employees.
Broad-Based vs Narrow-Based Weighted Average
The key difference between broad-based and narrow-based weighted average is what counts toward A in the formula.
Broad-based uses the fully diluted share count. That usually includes:
- Common stock
- Preferred stock
- Options
- Warrants
Narrow-based uses a smaller share pool, often just common stock plus the specific preferred series getting the protection.
That one choice changes the math in a big way. Broad-based leads to a smaller reset. Narrow-based leads to a larger one. And that, in turn, changes how much ownership moves in a down round.
How Ownership Impact Differs From Full Ratchet
Compared with full ratchet, weighted average is a softer approach. It tracks the size of the down round instead of forcing a full reset to the new lower price.
So if the down round is small, the conversion-price change is usually modest. If the round is larger, the reset gets bigger too, but it still tends to be less harsh than full ratchet.
Why Weighted Average Is the More Common Choice
Weighted average showed up in 60% of venture capital deals in 2023 and is the market standard in most U.S. venture deals [2]. Investors still get downside protection, but founders avoid the kind of severe dilution that full ratchet can cause.
| Feature | Broad-Based Weighted Average | Narrow-Based Weighted Average |
|---|---|---|
| Denominator (A) | Fully diluted (Common, Preferred, Options, Warrants) | Common + protected Preferred only |
| Investor Protection | Moderate | High |
| Founder Dilution | Lower; more equity preserved | Higher; more equity transferred |
| Market Prevalence | Industry standard | Less common; more investor-led deals |
| Negotiation Posture | Founder-friendly starting point | Investor-friendly |
In many deals, broad-based is the more founder-friendly place to start in negotiations.
Full Ratchet vs Weighted Average: Side-by-Side Tradeoffs
The main difference comes down to how much dilution each formula pushes onto the cap table when a down round happens.
Cap Table Impact: Investor Ownership, Founder Dilution, and Option Pool Pressure
Full ratchet can sharply increase investor ownership even after a small down round. Weighted average works differently. It scales the adjustment based on the size of the round, so the dilution is usually smaller and more in line with what actually happened. That’s why the formula matters just as much as the anti-dilution label at the top of the term sheet.
Down rounds can also lead to option pool top-ups or pre-money pool increases, and founders usually eat that dilution. For example, a $40 million pre-money valuation with a 15% pool increase leaves only about $34 million for existing holders [3].
That math often turns on a few terms that founders can still push on.
Term Sheet Points Founders Can Negotiate
Three terms matter most:
- Denominator definition. Broad-based weighted average includes all outstanding shares in the formula, including common, preferred, options, and warrants. If that definition gets narrowed, the math usually moves against founders, so it needs to be spelled out.
- Carve-outs. Shares issued for ESOPs, acquisitions, or strategic partnerships can be excluded so normal equity grants don’t accidentally trigger an anti-dilution adjustment.
- Pay-to-play and sunset clauses. Pay-to-play means investors must join the down round to keep anti-dilution rights. Sunset clauses end those rights at IPO or after a set number of years, which limits how long the risk stays on the table.
The table below shows how these three structures differ in leverage, dilution, and deal pressure.
Comparison Table: Full Ratchet vs Broad-Based vs Narrow-Based Weighted Average
| Feature | Full Ratchet | Broad-Based Weighted Average | Narrow-Based Weighted Average |
|---|---|---|---|
| How it works | Resets prior preferred shares to the new lower price, no matter how small the round is | Uses a formula with all outstanding shares to calculate a partial reset | Uses the same formula, but with a smaller share base, often preferred shares only |
| Investor Protection | Maximum | Moderate | High |
| Founder Dilution Severity | Severe; can be catastrophic in small rounds | Lowest; most founder-friendly outcome | Moderate to high; more punishing than broad-based |
| Typical Use Case | Distressed or heavily one-sided deals | Market standard | Less common; investor-favored deals |
| Effect on Future Fundraising | Negative signal; can make the cap table hard for new investors | Standard; expected and manageable | May need cleanup in later rounds |
| Founder Leverage | Founders need to push back hard | Low; the usual default in the market | Moderate; depends on founder leverage |
Conclusion: How to Evaluate Anti-Dilution Terms Before Closing a Round
Anti-dilution terms can change post-round ownership in a big way, especially in a down round. By Series B, founders have already given up a meaningful share of ownership [1]. And if you agree to terms before you model them, dilution can climb even more. The key issue is simple: how much does each formula change ownership in a worst-case round?
What to Model Before You Sign
Use the same assumptions for both formulas so you can see the dilution gap side by side. At a minimum, model these four cases:
- A small down round - to see how full ratchet and weighted average affect investor ownership and your stake under both formulas.
- A large down round - to test how hard the conversion price reset hits under each formula.
- Option pool and follow-on terms - model pool increases and whether this round’s terms carry into the next financing.
- Founder ownership at exit - run a waterfall model at different exit values to see how liquidation preferences work with anti-dilution adjustments, especially in low-exit cases [1].
In Q1 2024, 23% of all new venture rounds were down rounds - the highest rate in more than five years [1]. That’s not edge-case stuff. It’s worth modeling the downside before you sign.
Once you can compare each case side by side, the negotiation gets a lot more concrete. It stops being a guess and turns into a math problem. Full ratchet gives investors the most protection. Weighted average usually leaves founders with more ownership.
Phoenix Strategy Group can help build dilution models and cap table scenarios before you close.
FAQs
When should founders push back on full ratchet?
Founders should usually push back on full ratchet. It can be highly dilutive, and it ignores two big factors: how large the down round is and how many shares the company issues.
If an investor puts it on the table, try to negotiate guardrails like:
- sunset provisions
- carve-outs for employee stock options
- pay-to-play clauses
That way, you’re not stuck with a term that can hit the cap table much harder than the round itself might suggest.
How do carve-outs affect anti-dilution protection?
Carve-outs are exclusions that stop certain share issuances from triggering anti-dilution price adjustments. In plain English, they keep routine moves, like employee stock options or shares tied to a strategic partnership, from setting off investor protections by accident.
They can also cover bridge rounds or other tactical cash infusions, so anti-dilution provisions apply only to major equity events. That gives founders more room to operate and helps protect their ownership stake.
Does weighted average always protect founder ownership better?
Not always. A weighted average approach is often more balanced and usually less punishing for founders than full ratchet. But the result comes down to the exact formula used.
A broad-based weighted average is usually more founder-friendly because it counts all outstanding equity. A narrow-based version counts fewer shares, which can lead to a bigger price reset and more founder dilution.
