Full Ratchet Antidilution

The sale of a single share at a price less than the favored investors paid reduces the conversion price of the favored investors’ convertible preferred stock “to the penny.” For example, from $1.00 to 50 cents, regardless of the number of lower-priced shares sold.³
Full ratchet is an investor protection provision which specifies that options and convertible securities may be exercised relative to the lowest price at which securities were issued since the issuance of the option or convertible security. The full ratchet guarantee prevents dilution, since the proportionate ownership would stay the same as when the investment was initially made.⁵

Free cash flow

Fully Diluted Earnings Per Share

FundingSage

Definitioner

Securities

Includes all types of equity and debt instruments and rights in and to them.³

Dilution

Issuing more shares of a company dilutes the value of holdings of existing shareholders.² A reduction in the percentage ownership of a given shareholder in a company caused by the issuance of new shares.³

Preferred Stock

A class of ownership that has a higher claim on assets than Common Stock. In the event of Liquidation, preferred stock shareholders have priority over earnings and assets and generally earn dividends, but forego voting rights.²
A class of capital stock that may pay dividends at a specified rate and that has priority over common stock in the payment of dividends and the liquidation of assets. Many venture capital investments use preferred stock as their investment vehicle. This preferred stock is convertible into common stock at the time of an IPO.³
This is a type of corporate share where the holders can exercise more rights, preferences, and privileges than those with common stocks. It is often issued by private corporations or enterprises that have not gone public yet. Both angel investors and venture capitalists prefer to invest with preferred stock because of the superior rights and protective provisions associated with these shares.⁴

Option

A security granting the holder the right to purchase a specified number of a Company’s securities at a designated price at some point in the future. The term is generally used in connection with employee benefit plans as Incentive Stock Options (“ISOs” or “statutory options”) and Non-qualified stock options (“NSOs” or “Nonquals”).However “stand-alone options” may be issued outside of any plan. Generally non-transferable, in distinction to warrants.³

Convertible Preferred Stock

Preferred stock that may be converted into common stock or another class of preferred stock, either voluntarily or mandatory.³

Related Articles

The Holy Grail of Entrepreneurship: The Term Sheet, Part 3 – Capitalization Table

Convertible Security

A bond, debenture or preferred stock that is exchangeable for another type of security (usually common stock) at a pre-stated price. Convertibles are appropriate for investors who want higher income, or liquidation-preference protection, than is available from common stock, together with greater appreciation potential than regular bonds offer. (See Common Stock, Dilution, and Preferred Stock).³

Related Articles

Dilution: the real meaning of Funding Success

How should entrepreneurs approach the valuation question?

Convertible

Convertibles are the corporate securities, usually preferred shares or bonds, that can be exchanged for a set number of another form, usually common share, at a pre-stated price. Convertibles are appropriate for investors who want higher income than is available from common stock, together with greater appreciation potential than regular bonds offer. From the issuer's standpoint, the convertible feature is usually designed as a sweetener, to enhance the marketability of the stock or preferred.⁵

Related Articles

Giving Away Startup Ownership: How Much Is Too Much?

INFOGRAPHICS

INFOGRAPHICS

FundingSage

Popular Posts (Past Month)