The term ratchet is used in transaction agreements for two different mechanisms that should be kept separate.<\/p>
(a) Management ratchet (sweet equity): a contractual adjustment of management\u2019s shareholding quota in the target depending on performance thresholds at exit \u2014 typically tiered MOIC or IRR hurdles at the level of the shareholding in the target. On reaching the thresholds, management receives a disproportionately large share of the increase in value; correspondingly, a shortfall means a reduction of the sweet-equity tranche.<\/p>
(b) Anti-dilution full ratchet: an adjustment of an investor\u2019s conversion price to the lowest subsequent price if the company is refinanced in a down round. This variant is investor protection, not an incentive instrument; in DACH VC practice, broad-based weighted average is the dominant market standard (see Anti-Dilution).<\/p>
Return thresholds at fund level between the fund manager and the capital providers (hurdle, catch-up) are to be distinguished from this (see Carried Interest). Both ratchet variants are explanation-intensive in their design and must be carefully structured for tax and legal purposes.<\/p>","protected":false},"excerpt":{"rendered":"
The term ratchet is used in transaction agreements for two different mechanisms that should be kept separate. (a) Management ratchet (sweet equity): a contractual adjustment of management\u2019s shareholding quota in…<\/p>\n","protected":false},"menu_order":0,"template":"","meta":{"footnotes":""},"categories":[],"class_list":["post-9543","b5_glossar","type-b5_glossar","status-publish"],"yoast_head":"\n