June 23, 2011
Corporate Finance Roundtable: The Ratchet
Posted by Karl Okamoto

As the “try outs” for last year's Transactional Lawyering Meet team at Drexel, I created a little exercise. I gave the participants the following vignette. Imagine a client has come to you with a proposed term sheet for a round of venture capital financing. One of the terms set out in the term sheet reads as follows:

Anti-Dilution Provisions: 

In the event that the Company issues additional securities at a purchase price less than the current Series A Preferred conversion price, such conversion price shall be reduced to the price at which the new securities are issued.

I then told the students they needed to upload to Youtube a short video of themselves explaining the provision and their proposed response. The students did a good job. Some examples here, here and here.

Personally, I consider well-drafted anti-dilution clauses to be a shibboleth of skilled lawyering. An exercise like this should be on the bar exam. We could call it the “Ratchet,” as in “did you survive the Ratchet?”

Kidding aside, the most satisfying part of this exercise was the common refrain from the students.  It went like this:  "Having to explain the provision really forced me to understand it."  

And I replied, "welcome to the club."

Roundtable: Corp Fin | Bookmark

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