Full ratchet
A full ratchet is the strongest 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.
Last verifiedHow 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.
See it on DilutionScan
Companies DilutionScan covers, with the instruments read from their SEC filings. Open one to see each instrument and the filing it came from.
- GNSGenius Group Limited8 warrant series, 1 convertible, 1 ATM program, 3 shelf registrations and 2 completed offerings on file
- SMXSMX (Security Matters) Public Limited Company Ordinary Shares10 warrant series, 8 convertibles, 2 equity lines, 4 shelf registrations, 4 S-1 registrations and 2 completed offerings on file
- MLGOMicroAlgo, Inc. Ordinary Shares2 warrant series, 5 convertibles and 2 shelf registrations on file
- HOLOMicroCloud Hologram Inc. Ordinary Shares2 warrant series, 1 convertible, 3 shelf registrations and 2 completed offerings on file
Guides that use this term
- Toxic Convertible Notes: How Variable Pricing WorksToxic convertible notes explained: how variable conversion prices, VWAP discounts and lookback windows work, and what happens to share counts with no floor.
- Full Ratchet Anti-Dilution and Price Resets ExplainedFull ratchet vs weighted-average anti-dilution explained, plus price resets, with a worked share-count table as the stock falls from $1.00 to $0.10 per share.
Related terms
Check any ticker for dilution
DilutionScan reads each covered company's SEC filings and lists its warrants, convertibles, ATM programs, shelves and S-1s on one page, with a dilution rating and cash runway.
Definition from the Signal8 Academy glossary. Educational content only. DilutionScan and Signal8 are not broker-dealers or investment advisers, and nothing here is a recommendation to buy or sell any security.