A deep dive into post-close repricing mechanics—ratchets, MFN rights, side letters, and valuation reset triggers—how they appear in modern term sheets, and negotiation strategies founders can use to avoid hidden down-rounds.

The “Regret” Clause: How VC Term Sheets Quietly Re‑Price Your Round After Closing (and What Founders Can Do)

Founders tend to treat the close of a financing round as the finish line: the valuation is set, the cap table is updated, and everyone moves on to building. But modern venture documents can include provisions that effectively re-price the round after closing—sometimes automatically, sometimes through subtle incentives that make a later “reset” feel inevitable.

This is the heart of what many operators call a “regret clause”: a set of rights that lets an investor reduce their effective entry price (or increase their ownership) if the company later raises money on better terms for new investors, or on worse terms for the company. These mechanisms are not always bad-faith. Sometimes they’re a rational attempt to manage risk in frothy markets. But the practical effect can be founder-unfriendly: a hidden down-round that arrives through legal plumbing rather than a headline valuation cut.

This article explains the most common post-close repricing mechanics—ratchets, MFN rights, side letters, and valuation reset triggers—how they appear in term sheets and definitive docs, and what founders can do to negotiate them.

> Disclaimer: This is educational information, not legal advice. Term sheet economics and enforceability vary by jurisdiction and by the specific drafting.

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1) What “post-close repricing” really means

A priced equity round sets a price per share at signing/closing. Post-close repricing changes the effective price paid by an investor after the fact by granting them additional securities, improving their conversion terms, or retroactively applying more favorable economics if later investors get a better deal.

Think of it as one of three outcomes:

More shares for the same money (anti-dilution, ratchets, bonus issuances).

Better terms than everyone else (MFN, side-letter upgrades, special information/consent rights).

A forced “reset” event (automatic conversion price adjustments, pay-to-play triggers, milestone or financing failure consequences).

In classic venture practice, “repricing” was mostly discussed in the context of explicit down rounds and anti-dilution. What’s changed is how frequently some version of these protections shows up—even in rounds marketed as “standard NVCA” or “clean.”

Key point: Founders should evaluate not just the headline valuation, but the range of possible outcomes the documents permit.

References: NVCA Model Legal Documents (widely used baseline in the U.S.) provide standard approaches for preferred stock terms and anti-dilution mechanics. See: https://nvca.org/model-legal-documents/

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2) The classic repricer: anti-dilution (broad-based weighted average vs. full ratchet)

2.1 How anti-dilution works

Anti-dilution provisions adjust the conversion price of preferred stock if the company later issues shares at a lower price (a “down round”). The mechanism protects preferred holders from value erosion.

In a simplified view:

Preferred shares convert into common at a set conversion rate.

If a down round happens, the conversion price is adjusted downward.

Lower conversion price means preferred converts into more common.

Anti-dilution doesn’t always “reprice” the round immediately; it can sit dormant until a down round occurs. But economically, it is an embedded option.

2.2 Broad-based weighted average (common, usually acceptable)

Broad-based weighted average anti-dilution is the standard “market” mechanism. It softens the adjustment by considering how many shares are issued in the down round relative to the fully diluted capitalization.

Pros (founder/company): less punitive; aligns protection with actual dilution impact.

Pros (investor): still offers meaningful downside protection.

If you’re going to have anti-dilution, most founders prefer broad-based weighted average.

2.3 Full ratchet (the “nuclear” version)

Full ratchet resets the conversion price to the new lower price, regardless of how small the down round is.

Example (conceptual):

You raise at $10/share.

Later you do even a small bridge at $5/share.

Full ratchet effectively treats the earlier investor as if they bought at $5/share.

This can create massive dilution for founders and common holders, and it can also disincentivize new investors unless the round is structured carefully.

Opinionated take: In typical venture rounds for operating startups (not distressed financings), full ratchet is often a sign that the investor is pricing risk through terms rather than valuation. That may be rational for them, but founders should treat it as a major economic term—often more important than a $10–20M swing in headline valuation.

References: NVCA documents include weighted-average anti-dilution as a baseline. Full ratchet is less standard and often negotiated. See NVCA model docs referenced above.

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3) The newer “quiet repricer”: MFN rights (and why they matter)

3.1 What an MFN clause does

An MFN (Most Favored Nation) clause generally gives an investor the right to receive terms at least as favorable as those granted to later investors, or to other investors in the same round via side letters.

MFNs can appear in:

Side letters (very common).

Convertible instruments (SAFEs/notes) where early investors want the right to adopt later, better terms.

Occasionally in equity rounds through special investor rights.

MFN isn’t inherently about price per share. But it can become a repricer because “better terms” often include liquidation preference, participation, dividends, anti-dilution, pro rata rights, governance, and protective provisions—all of which can change the effective economics.

3.2 The hidden risk: MFN + side letters = stealth standard creep

A company may grant an early investor a special right in a side letter to close the round. Later, another investor negotiates a slightly better package—maybe stronger pro rata, a board observer seat, or a special information right. If the first investor has an MFN, they can “upgrade” into the later investor’s terms.

Over time, this can:

Expand the set of investors with veto or consent rights.

Inflate the administrative burden (more reporting, more approval gates).

Reduce founder flexibility for future financings.

3.3 MFN in bridge financings: where it can reprice

MFNs are especially potent in bridge rounds (convertible notes or SAFEs) when:

Investor A invests early with an MFN.

Investor B invests later and negotiates a lower valuation cap or a bigger discount.

Investor A elects to adopt B’s better economics.

That is a retroactive price improvement—a repricing of A’s investment.

Opinionated take: MFNs are often presented as “harmless fairness.” In practice, broad MFNs are an open-ended commitment that you may not be able to model at signing.

Reference: While not an “NVCA core term” for priced rounds, MFN side letters are common in market practice; many law firm memos discuss MFNs in SAFEs/notes as a key negotiation point.

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4) Side letters: where the real deal sometimes lives

4.1 Why side letters exist

Side letters are often used to grant rights that are not included in the main financing documents. They can cover:

Enhanced information rights.

Pro rata / super pro rata participation.

Future advisory arrangements.

Special consent/veto rights.

Tax reporting, regulatory, ESG, or policy commitments.

The danger is not that side letters exist. The danger is that they can create a second, hidden layer of economics and control.

4.2 Common “repricing-adjacent” side letter terms

These provisions don’t always change price per share, but they can change effective outcomes:

Super pro rata rights: The right to buy more than pro rata in the next round can let an investor increase ownership at a known price, potentially crowding out new investors and affecting negotiation leverage.

Fee shifting / expense reimbursement beyond typical caps: increases the cost of fundraising; indirectly changes the net proceeds.

Consent rights on future financings: can force a company into a structure favorable to existing investors (including repricing structures).

Most favored nation clauses embedded in the side letter.

4.3 Operational risk: founders don’t track them

Side letters often get less scrutiny because they seem “non-economic.” They can also be signed late, under time pressure.

Founder rule: Treat side letters as first-class financing documents. If you can’t summarize every side letter in one page, you probably don’t understand your future constraints.

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5) Valuation reset triggers: “automatic down-rounds” without calling them down-rounds

Some provisions don’t directly change conversion price on issuance of cheaper stock; instead they create conditional economics that snap into place if the company fails to meet a milestone, doesn’t raise a qualified financing, or raises one below a threshold.

5.1 Milestone-based tranches (a structured reset)

A tranche financing closes part of the money now and part later, conditional on milestones.

If milestones are missed, the second tranche may occur at a lower price or with more investor-friendly terms.

That effectively re-prices the original commitment because the company is now dependent on insider capital at pre-agreed (often worse) economics.

This can be reasonable in capital-intensive or R&D contexts. But in software, tranches can sometimes function as a control mechanism: the investor gets an option to invest more only if things go well, while the company bears the downside.

5.2 “Qualified financing” deadlines in notes/SAFEs

Convertible notes and SAFEs may include triggers if a qualified financing doesn’t occur by a date:

higher interest or default-like economics (notes),

conversion at a punitive price,

investor consent rights that tighten,

redemption rights (rare in true venture, more common in growth/distressed).

These provisions can pressure a company into taking a lower-priced round just to clear the trigger—again, a quiet repricing outcome.

5.3 Pay-to-play and pull-forward mechanics

Pay-to-play provisions require investors to participate in a down round to keep preferred status (or avoid conversion to common). While often discussed as company-friendly (it pressures insiders to support), pay-to-play can also show up with coercive structures that make the down round more likely or make insiders’ terms more powerful.

In practice, the existence of pay-to-play can shift negotiating leverage in a tough market.

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6) Ratchets beyond classic anti-dilution: performance ratchets and warrant coverage

The term “ratchet” gets used loosely. Beyond full ratchet anti-dilution, founders may encounter:

6.1 Performance-based ratchets

An investor receives additional shares (or a conversion price reduction) if the company fails to meet performance targets, and sometimes gives shares back (or adjusts upward) if the company exceeds targets.

In late-stage/growth equity, performance ratchets can resemble structured equity or private equity-style instruments. For earlier-stage venture, they’re less common but can appear in stressful negotiations.

These ratchets can be framed as “alignment,” but they often place asymmetric risk on founders.

6.2 Warrant coverage

Warrants grant the right to buy shares at a set strike price, often the current round price.

If the strike is at the current price and warrants are free, it’s effectively a discount.

Warrants can be triggered by future financings or milestones.

Warrants are more common in venture debt and some growth rounds, but they can appear in equity rounds when investors want extra upside without paying for it.

Reference: Venture debt and warrant structures are widely documented by firms like Silicon Valley Bank’s historical market commentary and law firm primers (many are public).

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7) “Repricing” via control: protective provisions that force future economics

Not all repricing is mathematical. Sometimes the documents give certain investors the ability to block or steer future financings, effectively ensuring that any future round happens only on terms that protect (or improve) their entry economics.

Key terms to watch:

Protective provisions / veto rights over issuing new securities, changing the option pool, or incurring debt.

Board control or board observer rights that influence timing and structure of a financing.

Drag-along / redemption / liquidity rights that pressure the company into a financing or sale.

If an investor can block a clean up-round, they can create leverage for a structured recap or inside-led down round that triggers anti-dilution in their favor.

Opinionated take: Many founders underestimate “soft repricing”: if you don’t control your financing path, you don’t control your valuation.

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8) How these clauses show up in modern term sheets (where to look)

Founders often read the term sheet as if it is the deal. In reality, many repricing mechanisms are:

Mentioned vaguely in the term sheet and specified in definitive docs.

Not mentioned at all in the term sheet but introduced through side letters.

“Standard” in templates but heavily variable in drafting.

Where to look:

Term sheet: Anti-dilution section (type: broad-based weighted average vs full ratchet).

Investor Rights Agreement (IRA): pro rata rights, information rights, sometimes MFN-like side letter commitments.

Voting Agreement / Charter: protective provisions, class votes, conversion mechanics.

Side letters: MFN, special consents, special reporting.

Convertible instrument docs (if applicable): MFN, cap/discount, qualified financing definitions, deadlines.

Founder best practice: build a one-page “rights matrix” listing each investor and their special rights.

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9) Why investors ask for regret protection (and when it’s reasonable)

It’s easy to frame regret clauses as predatory. Sometimes they are. But there are also legitimate investor motivations:

Market volatility: Investors fear buying at the top and getting punished by a later reset.

Signaling risk: A down round can be catastrophic for employee morale and recruiting; anti-dilution is a behind-the-scenes mitigation.

Asymmetric information: Investors may feel founders control timing and disclosure; they want guardrails.

Portfolio math: A fund’s returns are driven by outliers; losing ownership in winners due to later financings hurts.

There are contexts where stronger downside protection can be reasonable:

Distressed or turnaround financings.

Very capital-intensive businesses with binary technical risk.

Insider-led rounds where existing investors are providing life-support capital.

The founder’s job is not to moralize. It’s to price these terms explicitly and decide whether the capital is worth it.

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10) Negotiation strategies: how founders avoid hidden down-rounds

10.1 Anchor on a principle: “If you want downside protection, pay for it in valuation.”

When an investor asks for full ratchet, warrants, or broad MFN, the founder can respond:

“We can discuss protection, but we need to re-trade valuation or round size to reflect that.”

This reframes the ask as economic, not “standard.” Many term battles are won by forcing explicit pricing.

10.2 Prefer broad-based weighted average, resist full ratchet

If an investor insists on full ratchet, attempt to narrow:

apply only to a limited time window (e.g., 6–12 months),

exclude certain issuances (strategic partnerships, employee equity, small bridges),

cap the adjustment,

or step down from full ratchet to narrow-based weighted average (still less favorable than broad-based).

10.3 Carve-outs and definitions matter more than the headline clause

Anti-dilution and repricing triggers depend heavily on what counts as an issuance at a lower price.

Negotiate exclusions for:

employee option grants under an approved plan,

conversion of outstanding notes/SAFEs (so you don’t double-trigger),

strategic issuances,

equipment/venture debt warrants (within limits),

small financings below a threshold.

Poor carve-outs can create accidental repricing from routine actions.

10.4 Narrow MFN scope (and duration)

If you must grant MFN:

Limit it to economic terms only (or better: specific clauses only).

Exclude governance and consent rights.

Exclude side letters entirely, or limit to a defined set.

Add a sunset (e.g., MFN expires after the next financing or after 9–12 months).

Require the investor to elect MFN within a short period after notice.

MFN should be a scalpel, not a blanket.

10.5 Control side letters: disclosure, board awareness, and parity

Practical guardrails:

Require that all side letters be disclosed to the board.

Keep a side letter schedule in the closing binder.

Avoid granting investor-specific vetoes via side letters; put governance in core docs.

If you must grant a special right, consider making it available to a defined “Major Investor” threshold rather than a single party.

10.6 Watch pro rata and super pro rata: protect the next round

Pro rata rights are normal. Super pro rata can become a repricing tool by allowing an investor to effectively “average down” and maintain control.

Negotiate:

caps on participation,

termination of super pro rata at the next qualified financing,

exclusion if the investor doesn’t participate meaningfully (pay-to-play concept).

10.7 Don’t accept financing vetoes that let one investor hold you hostage

Protective provisions are standard, but the scope is negotiable.

Red flags:

veto on any new financing regardless of size,

veto on option pool increases (sometimes needed for hiring),

veto thresholds so low that a small holder can block.

Try to:

raise thresholds (e.g., consent of majority of preferred, not each series),

limit vetoes to major actions,

ensure the company retains flexibility for small bridges.

10.8 Use competing term sheets strategically

The best antidote to regret clauses is leverage.

Run a process when possible.

Ask your counsel to mark up “non-market” terms.

Use market references: “We’re targeting NVCA-standard broad-based weighted average; no MFN side letters.”

Leverage doesn’t guarantee a clean deal, but it shifts the burden of justification.

10.9 Model outcomes, not just valuation

Ask your finance lead or counsel to help model:

a flat round,

a moderate down round,

a severe down round,

a bridge with a low cap,

an inside-led recap.

Include anti-dilution impacts, option pool refresh, and pro rata.

Founders are often shocked to find that a seemingly small clause changes ownership more than 10–15% of valuation.

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11) What founders can do after closing (yes, you still have options)

If you already closed and later discover repricing risk:

Inventory all rights: consolidate charter, IRAs, side letters, notes, and amendments.

Clarify ambiguous drafting: sometimes language is negotiable by amendment or through counsel-to-counsel clarification.

Build goodwill early: if a reset event approaches, you want collaborative insiders, not adversarial ones.

Plan financing paths: avoid triggering provisions accidentally (e.g., small low-price issuances that trip anti-dilution).

Consider preemptive cleanup: in strong times, you may be able to amend to remove aggressive terms before the next downturn.

Amendments require investor consent, but investors sometimes accept cleanup if the company is performing and the change supports a bigger up-round.

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12) A practical founder checklist (term sheet to closing)

Use this as a working checklist:

Economic repricers

[ ] Anti-dilution type: broad-based weighted average preferred.

[ ] Any full ratchet? If yes, can it be time-limited, capped, or removed?

[ ] Warrants? How much coverage, what triggers, what strike, what duration?

[ ] Performance ratchets? Are they symmetric or asymmetric?

MFN and side letters

[ ] Any MFN clause? Scope limited? Sunset included?

[ ] Side letters disclosed and summarized?

[ ] Any special consents, super pro rata, or hidden economics?

Trigger events

[ ] Qualified financing definition: realistic threshold?

[ ] Maturity/date triggers (notes) and consequences?

[ ] Milestone tranches: who judges achievement, and what happens if missed?

Control that enables repricing

[ ] Protective provisions: are thresholds reasonable?

[ ] Financing vetoes: limited to major actions?

[ ] Board composition: does it preserve operational flexibility?

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13) Where market “standards” actually come from (and why that matters)

Many investors (and sometimes founders) say a term is “standard.” Standard relative to what?

NVCA documents are a reference point, not a law of nature.

Regional markets differ (Bay Area vs. other ecosystems).

Market cycles change what gets labeled “standard.”

In 2020–2021, founders often had leverage and terms were cleaner. In down cycles, structure returns. The risk is when down-cycle terms persist into up-cycle pricing, creating a mismatch: founders accept high valuations with embedded downside traps.

Founders should treat “standard” as a prompt for a follow-up question:

> “Standard for which stage, which market, and which year?”

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14) Conclusion: price the round you actually signed, not the one you think you signed

Post-close repricing is not just a legal curiosity. It’s a core determinant of outcomes for founders, employees, and even future investors. Ratchets, anti-dilution, MFNs, side letters, and valuation reset triggers can turn a seemingly attractive round into one that quietly shifts ownership and control when the company is most vulnerable.

A healthy venture deal aligns incentives: investors get reasonable downside protection; founders retain the flexibility to finance the business; employees aren’t unintentionally punished by hidden dilution mechanics.

The practical path forward is straightforward but not easy:

Identify repricing mechanisms early.

Demand explicit pricing of any downside protection.

Narrow scope, add sunsets, and insist on clear carve-outs.

Track side letters like core documents.

Model scenarios and negotiate from outcomes, not optics.

The best time to fix a regret clause is before you sign. The second-best time is before you need the next round.

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References and further reading

NVCA Model Legal Documents (preferred stock financing templates; baseline for many U.S. venture deals): https://nvca.org/model-legal-documents/

Y Combinator SAFE documents (common convertible instrument forms; MFN versions exist): https://www.ycombinator.com/documents

SEC EDGAR (to find real charter language, investor rights agreements, and amendments for venture-backed companies that later went public): https://www.sec.gov/edgar/search/

Leading law firm primers (Wilson Sonsini, Cooley, Fenwick, Gunderson, etc.) often publish accessible explanations of anti-dilution, pay-to-play, and financing terms; specific memos vary by year and market cycle.