Ratchet (price reset provision)
A ratchet is a clause that lowers a warrant's exercise price or a convertible's conversion price if the company later issues stock at a lower price, or if the stock trades below a set level.
Last verifiedHow it works
A ratchet protects the holder of a warrant or convertible from later, cheaper deals. If the company issues shares (or securities convertible into shares) at a price below the holder's current price, the holder's price is adjusted downward. Some ratchets also reset on a date or on a stock price trigger, for example "on the 30th day after effectiveness, the exercise price resets to the lower of the current exercise price and the five-day average VWAP".
There are two broad formulas:
- Weighted average: the price moves down part of the way, depending on how many new shares are issued at the lower price. This is the gentler form.
- Full ratchet: the price drops all the way to the new, lower price, regardless of how small the new issuance is (see full ratchet).
Many warrant agreements also increase the number of shares exercisable when the price is lowered, so the holder's total exercise cost stays the same.
Worked example
Hypothetical: Company X has 5,000,000 warrants at $2.00 with a full ratchet and share-count adjustment. It later sells stock at $1.00. The exercise price resets to $1.00 and the warrants now cover 10,000,000 shares, doubling the warrant overhang without any new warrants being issued.
Why it matters
Ratchets can make one financing change the economics of every earlier one. They also make the potential share count depend on the company's future deal prices.
How to spot it
Look in the warrant or note exhibit for sections titled "Adjustments", "Subsequent Equity Sales" or "Price Adjustment". The guide Resets and ratchets covers the variations.
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
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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.