Ratchets
Ratchets are special clauses in investment agreements that protect or increase an investor's ownership percentage or financial returns based on company performance. Think of them like automatic adjustments that kick in when certain goals aren't met. For example, if a company doesn't hit its growth targets, the investor might automatically get more shares to make up for it. This term is often seen in venture capital and private equity deals. You might also hear them called "anti-dilution provisions" or "performance ratchets." They act like a safety net for investors, ensuring they maintain or improve their position even if things don't go as planned.
Examples in Resumes
Structured deal terms including Ratchets to protect investor interests
Implemented Ratchet provisions in Series B financing round
Negotiated Ratchets and Anti-dilution provisions for multiple PE transactions
Typical job title: "Private Equity Associates"
Also try searching for:
Where to Find Private Equity Associates
Professional Networks
Industry Resources
Example Interview Questions
Senior Level Questions
Q: How would you structure a ratchet provision to protect downside while incentivizing management?
Expected Answer: Should explain how to balance investor protection with management motivation, discussing different trigger events and adjustment mechanisms that are fair to both parties.
Q: What are the potential drawbacks of implementing aggressive ratchet provisions?
Expected Answer: Should discuss how overly aggressive ratchets can demotivate management, complicate future funding rounds, and potentially create accounting challenges.
Mid Level Questions
Q: Can you explain different types of ratchets and when to use them?
Expected Answer: Should be able to explain basic differences between performance ratchets, anti-dilution ratchets, and time-based ratchets, with simple examples of when each is appropriate.
Q: How do you calculate the impact of a ratchet provision on ownership percentages?
Expected Answer: Should demonstrate understanding of basic ownership calculations and how ratchets adjust these based on different scenarios.
Junior Level Questions
Q: What is a ratchet provision and why is it used?
Expected Answer: Should explain in simple terms that ratchets protect investors by adjusting their ownership or returns if certain conditions aren't met.
Q: What are the common performance metrics used in ratchet provisions?
Expected Answer: Should mention basic metrics like revenue growth, EBITDA targets, or exit values that typically trigger ratchet adjustments.
Experience Level Indicators
Junior (0-2 years)
- Basic understanding of deal structures
- Financial modeling fundamentals
- Understanding of common ratchet types
- Deal documentation review
Mid (2-5 years)
- Ratchet clause drafting
- Deal negotiation support
- Financial impact analysis
- Term sheet preparation
Senior (5+ years)
- Complex deal structuring
- Leading negotiations
- Strategic implementation of protection mechanisms
- Portfolio company management
Red Flags to Watch For
- Inability to explain basic ratchet mechanics
- No experience with deal documentation
- Lack of understanding of shareholder agreements
- Poor grasp of basic financial metrics
Related Terms
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