R

A ratchet clause refers to an antidilution protection mechanism in the investment contract that investors employ to protect themselves from a dilution of the equity that results from a later issue of stock at a lower price than the investor had originally paid. Th ere are two principal types of antidilution mechanisms: full ratchets and partial ratchets, the latter also being called weighted

average ratchets. If a company sells equity at a price below that of a previous issue, a full ratchet clause will oblige the company to adjust the price of the outstanding preferred stock to the dilutive price of the new issue, regardless of the amount of stock sold at that price.