Ratchet
A ratchet is a common term in venture capital and investment agreements that protects investors' ownership stakes. Think of it like a one-way gear that only moves in one direction - in this case, protecting investors from having their share of ownership diluted when a company's value goes down. It's a safety mechanism that ensures early investors maintain their percentage of ownership even if the company raises more money at a lower valuation later. This concept is especially important in challenging economic times when company valuations might fluctuate.
Examples in Resumes
Structured Series A financing with Ratchet protection clauses for investors
Negotiated Ratchet terms in downround protection agreements
Implemented Anti-dilution Ratchet provisions in term sheets for seed-stage investments
Typical job title: "Venture Capital Associates"
Also try searching for:
Where to Find Venture Capital Associates
Professional Networks
Industry Resources
Example Interview Questions
Senior Level Questions
Q: How would you explain the difference between full ratchet and weighted average anti-dilution protection?
Expected Answer: A senior candidate should be able to clearly explain that full ratchet gives investors complete price protection in down rounds, while weighted average considers the size of the new financing relative to the company's total capitalization, providing more balanced protection.
Q: When would you advise against including ratchet provisions in a term sheet?
Expected Answer: The candidate should discuss how ratchets can discourage future investors, potentially harm company morale, and might signal lack of confidence in the company. They should mention alternatives like pay-to-play provisions.
Mid Level Questions
Q: What are the key components of a ratchet provision in a term sheet?
Expected Answer: Should be able to explain the basic elements: trigger events, conversion price adjustments, and how the mechanism protects against dilution. Should understand how these affect cap table calculations.
Q: How do you model the impact of a ratchet provision in a down round?
Expected Answer: Should demonstrate understanding of cap table modeling, explain how to calculate new ownership percentages, and show awareness of implications for both investors and founders.
Junior Level Questions
Q: What is the purpose of a ratchet provision?
Expected Answer: Should explain in simple terms that it protects early investors from losing value in their investment if the company raises money at a lower valuation later.
Q: What is a down round and why does it trigger ratchet provisions?
Expected Answer: Should be able to explain that a down round is when a company raises money at a lower valuation than previous rounds, and how this typically activates investor protections.
Experience Level Indicators
Junior (0-2 years)
- Basic understanding of term sheets
- Cap table basics
- Financial modeling fundamentals
- Understanding of basic VC concepts
Mid (2-5 years)
- Term sheet negotiation
- Advanced cap table modeling
- Deal structure analysis
- Due diligence experience
Senior (5+ years)
- Complex deal structuring
- Portfolio company management
- Investment strategy development
- Lead negotiator experience
Red Flags to Watch For
- Inability to explain basic term sheet concepts
- Lack of understanding of cap table mathematics
- No experience with investment documentation
- Poor grasp of dilution mechanics
Related Terms
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