Full Ratchet Explained: The 2025 Guide for Australian Startups and Investors

Full ratchet anti-dilution clauses are making headlines again as Australia’s startup ecosystem matures and market volatility drives tough funding negotiations in 2025. Whether you’re a founder raising capital or an investor protecting your stake, understanding how full ratchet works—and how it’s being used in today’s deals—can make or break your next round.

What Is Full Ratchet and Why Does It Matter?

Full ratchet is a type of anti-dilution protection used in venture capital deals. It ensures that if a company issues new shares at a lower price than an earlier round, investors with full ratchet protection get their earlier investment price adjusted downward to match the new, lower price. This adjustment typically happens by granting them extra shares, protecting their percentage ownership from being diluted by the down round.

• Example: If an investor bought shares at $2 each and the company later issues shares at $1, full ratchet lets the original investor’s price reset to $1, often by issuing extra shares for free.

• Implication: Founders and existing shareholders bear the brunt of dilution, while protected investors maintain their stake.

Full ratchet is generally considered the most aggressive anti-dilution mechanism. In contrast, the more common weighted average approach spreads dilution more evenly among all shareholders.

Why Full Ratchet Is Back on the Table in 2025

After several years of bullish growth, 2024 saw a correction in private tech valuations. According to recent data from Australia’s Venture Capital Association, down rounds increased by 22% in the past year, prompting more investors to push for full ratchet clauses. Key drivers include:

• Market Uncertainty: Higher interest rates and global economic jitters have made capital harder to secure, giving investors more negotiating power.

• Protecting Returns: With exit timelines extending, investors are using full ratchet to safeguard their upside in case of future down rounds.

• Policy Shifts: 2025 tax reforms, including changes to the Early Stage Innovation Company (ESIC) program, have made some investors more cautious, leading to stricter term sheets.

However, the Australian Investment Council has cautioned that overuse of full ratchet provisions can stifle founder incentives and make companies less attractive for future funding.

How Founders and Investors Can Navigate Full Ratchet in Today’s Market

Whether you’re negotiating a seed round or a Series B, understanding the pros and cons of full ratchet is crucial. Here’s how both sides are approaching these clauses in 2025:

For Founders:

• Push for Weighted Average: Many founders negotiate for weighted average anti-dilution as a more balanced alternative.

• Cap the Provision: Limit full ratchet rights to a single down round or set a time expiry (e.g., 18 months).

• Disclose and Discuss: Be transparent with all investors—future rounds may be harder to raise if prior investors have aggressive protections.

For Investors:

• Use Full Ratchet Selectively: Many leading VCs reserve full ratchet for bridge rounds or riskier investments, rather than as a default.

• Balance with Founder Incentives: Overly aggressive terms can backfire if they demotivate the founding team or jeopardize future fundraising.

• Stay Informed: Keep up with the latest policy updates and market data—2025’s regulatory tweaks may affect deal structures and tax outcomes.

Real-World Example: Full Ratchet in Action

In early 2025, a Sydney-based fintech closed a bridge round after a valuation reset. The lead investor insisted on full ratchet protection. When a subsequent down round occurred at a 40% lower valuation, the investor’s shareholding jumped from 10% to 15%, while the founders’ and employees’ stakes were heavily diluted. The company later struggled to attract new backers due to the lopsided cap table—a cautionary tale for both sides.

The Bottom Line

Full ratchet anti-dilution is a powerful tool that’s shaping Australian dealmaking in 2025, but it comes with real trade-offs. Founders should approach these provisions with care, and investors should weigh short-term protection against long-term company health. As the market evolves, transparent negotiations and balanced terms will remain key to building successful, sustainable startups.