Anti-Dilution Rights — Full Ratchet Method [Part 2 of the five-part series]

Ratchet

In Part 1 of the Anti-Dilution Rights story, we discussed the Anti-Dilution Rights in general, and identified that there are two mechanisms for Anti-Dilution Rights protection: i. Full Ratchet Method; and ii. Weighted Average Method.

In this Part 2, we will dig deeper into the Full Ratchet Method.

The Full Ratchet Method is a simpler method of calculating the number of additional shares that the start-up company needs to provide to the original investor in order to comply with the Anti-Dilution Rights. Under this method, the price at which the new investor has subscribed to the shares of the start-up company (“New Price”) is taken into consideration. Then, the number of shares, the original investor would have received, for his actual investment amount at the New Price is calculated. Thereafter, the number of shares actually received by the original investor in the first round of investment is deducted from the number of shares the investor would have received at the New Price. The result is the number of shares that must be allotted to the original investor in order to comply with the Anti-Dilution Rights.

Formula:

Original Investment/New Price = Shares 1st Investor would have got at New Price (New Price Shares)

New Price Shares — 1st Investor’s Shares = Shares to be allotted to Investor

Calculation:

10000/50 = 200

200–100 = 100 (Additional Shares to be provided to 1st Investor under Full Ratchet)