Rounds & financing
A down round is a financing priced below the company's previous round valuation, which dilutes existing shareholders more heavily and usually triggers anti-dilution adjustments in favour of earlier investors.
The immediate effect is arithmetic. A lower price per share means the same amount of money buys more of the company, so existing holders give up more ownership than they would have at the previous valuation.
The second effect is contractual. Anti-dilution provisions in earlier rounds adjust those investors' conversion prices downward, increasing their share count at the expense of common holders. Where a full ratchet exists, that adjustment can be severe.
The third effect is on employees, whose options may now have strike prices above the new share price, making them worthless unless repriced.
Companies often try structure instead of a lower headline price: a higher liquidation preference, participation, or a large discount on a convertible. These preserve the valuation optics while transferring the same or more economic value to the investor.
A clean down round is frequently better than a structured flat one. The structure is harder to see, harder to unwind, and compounds at the next financing.
Not necessarily. Market-wide repricing, a change in comparable multiples, or an over-priced previous round can all produce one at companies that are still growing.
Raise less at a defensible price, extend runway through revenue or cost reduction, or use a bridge round. Accepting heavy structure to protect a headline valuation often costs more than the down round would have.
Options with strike prices above the new share price are underwater. Boards commonly respond with a repricing or a fresh grant at the new lower strike.
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