Investment agreements may have a ratchet clause included, which is designed to protect the rights of the investor when the company is not performing as expected.
For example, when an investment was made in a company, a ratchet clause was included in the agreement that stated that if the company did not generate enough profit over a given period, the investor’s shares have twice the voting rights. If the investor had 40% of the voting equity and this clause was activated, the investor would increase his voting rights to 57% (40 * 2 / (100 + 40) ) giving them effective control of the company.
Ratchet clauses were common in the early 2000′s but have become less popular since they are difficult to agree on during negotiations.
See also: Positive Ratchet Clause.
sending...