What is a ratchet?
By SuLe · Updated 6 May 2026
A ratchet is a mechanism that adjusts equity based on outcomes. The two main kinds pull in opposite directions: an anti-dilution "full ratchet" repriced an investor's shares if you later raise at a lower price, while a "management ratchet" grants founders or managers extra equity for hitting agreed targets. Both are negotiated terms, not defaults.
Key facts
- A ratchet adjusts equity based on outcomes — it can favour investors or founders depending on the type.
- A full ratchet is the most aggressive anti-dilution: it repriced an investor's shares to a later lower price.
- Full-ratchet anti-dilution is aggressive and rare in the UK, where weighted average is standard.
- A management ratchet grants founders or managers extra equity for hitting milestones.
- Any ratchet is a term to model carefully — the trigger and mechanics decide who wins.
What are the two main types of ratchet?
The word "ratchet" covers two quite different mechanisms. The first is an anti-dilution ratchet — a full ratchet — which protects an investor by repricing their shares downward if you later raise money more cheaply.
The second is a management (or founder) ratchet, which rewards the founders or key managers with additional equity if the company hits agreed performance targets, such as revenue or exit value.
They point in opposite directions: one shifts equity toward the investor after a bad round, the other toward the founders after a good result. What they share is that both adjust the cap table based on later outcomes.
How does a full ratchet work — and why avoid it?
A full ratchet is the bluntest form of anti-dilution protection. If you raise a down round, the investor's earlier shares are repriced as if they had paid the new, lower price for their entire holding.
The effect is severe. Even a small issue of cheap shares can trigger a large reissue to the protected investor, heavily diluting founders and the option pool — far more than a weighted-average adjustment would.
That is why full ratchets are investor-aggressive and uncommon in the UK, where broad-based weighted average is the standard formula. Treat a full-ratchet request as a red flag worth resisting.
How does a management ratchet work?
A management ratchet grants the founders or key managers extra shares (or a better conversion) if the company achieves defined milestones. It is a performance incentive baked into the equity structure.
The milestones might be revenue thresholds, a target valuation at the next round, or an exit above a set value. Hit them, and the founders' share of the company steps up.
The catch is definition. Vague targets, or unclear mechanics for how and when the extra equity is issued, cause disputes exactly when there is money on the table. Precise drafting — measurable targets, a clear issue mechanism — is essential.
Where does UK law fit, and how common are ratchets?
Ratchets are contractual, implemented by adjusting share rights or issuing new shares within the Companies Act 2006 framework of allotments and class rights. Any adjustment needs the right authorities, resolutions and Companies House filings.
In practice, full-ratchet anti-dilution is rare in UK venture deals. Management ratchets appear in some growth-stage and private-equity-style transactions but are not a feature of ordinary seed rounds. UK terms commonly follow the BVCA model documents, whose default anti-dilution is weighted average, not full ratchet.
The practical takeaway: neither ratchet is a default, so if one appears in your term sheet, model it before agreeing.
| Full ratchet (anti-dilution) | Management ratchet | |
|---|---|---|
| Favours | The investor | Founders / managers |
| Triggered by | A down round | Hitting performance targets |
| Effect | Reprices investor's shares to new low price | Grants extra equity to management |
| UK prevalence | Aggressive and rare | Occasional, growth-stage |
| Key drafting risk | Severe founder dilution | Vague or disputed targets |
Worked example
Léa's SaaS company raised a Series A: a fund invested for 1,000,000 preference shares at £2.00 each with full-ratchet anti-dilution. A hard year forces a small down round at £1.00 per share.
Under the full ratchet, the fund's conversion price drops to £1.00, so its 1,000,000 preference shares now convert into roughly 2,000,000 ordinary — doubling its stake off the back of a modest cheap issue, and heavily diluting Léa.
Contrast a management ratchet Léa negotiated on a separate deal: she and her co-founder would receive an extra slice of equity if the company reached £5m annual recurring revenue by a set date. There, the ratchet rewarded performance rather than punishing a down round.
Where founders go wrong
Accepting a full ratchet
— it concentrates all the down-round pain on you; insist on broad-based weighted average instead.Assuming "ratchet" always favours the investor
— a management ratchet can favour founders; know which type you are discussing.Leaving management-ratchet targets vague
— imprecise milestones cause disputes when it counts; define them measurably.Not modelling the trigger
— run a down round (for anti-dilution) or the milestone maths (for a management ratchet) before signing.
Related questions
What is a ratchet in a funding deal?
A ratchet is a mechanism that adjusts equity based on outcomes. The two main kinds are an anti-dilution "full ratchet", which repriced an investor's shares if you later raise at a lower price, and a "management ratchet", which grants founders or managers extra equity for hitting agreed targets.
What is a full ratchet?
A full ratchet is the most aggressive form of anti-dilution. If you raise a later round at a lower price, the investor's shares are repriced as if they had paid that lower price for their whole holding — giving them many more shares. It is investor-aggressive and rare in the UK. [More: What is anti-dilution protection and how does it work?]
What is a management ratchet?
A management ratchet works the other way: founders or key managers receive extra equity if the company hits agreed milestones, such as revenue or exit-value targets. It rewards performance and can offset dilution, but the targets and mechanics need careful drafting to avoid disputes later.
Are ratchets common in UK startups?
Full-ratchet anti-dilution is uncommon and aggressive in the UK, where broad-based weighted average is standard. Management ratchets appear in some growth and private-equity-style deals but are not a fixture of ordinary seed rounds. Treat any ratchet as a term to model carefully, not a default. [More: What is a down round and what does it trigger?]
The same word, "ratchet", can mean a term that quietly doubles an investor's stake or one that rewards you for hitting your numbers — so the detail matters enormously. A SuLe solicitor can identify which kind is in your term sheet, model the trigger, and push back on a full ratchet. Book a free term sheet review before you agree it.
Keep reading: What is anti-dilution protection and how does it work? · What is a down round and what does it trigger? · What is a liquidation preference? · Participating vs non-participating liquidation preference — what's the difference? · What founder protections should I negotiate in a term sheet? · What is a warrant and why do accelerators use them?
Primary sources: BVCA — model documents for UK venture capital · Companies Act 2006
