Weighted Average Ratchet
Private Credit glossary · Underwriting & Credit Analysis
Definition
Anti-dilution mechanism adjusting conversion price based on relative dilution.
Weighted Average Ratchet in plain English
When investors buy into a startup, they get a 'conversion price' — the price at which their earlier investment turns into shares. Trouble comes if the company later sells new shares more cheaply, which shrinks (dilutes) the value of what early investors hold. A weighted average ratchet is a protection rule that nudges early investors' conversion price DOWN to partly make up for that cheap new round — but only by an amount that accounts for HOW MUCH cheap stock was sold, not the full gap. It's the gentler, fairer cousin of harsher anti-dilution clauses: it cushions the early backer without brutally punishing the company for one discounted raise.
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