What is a Down Round?
A down round occurs when a company raises money at a lower valuation than its previous funding round. If you raised Series A at $20M post-money and Series B prices you at $15M pre-money, that's a down round.
Down rounds signal that the company hasn't grown as expected, or that market conditions have deteriorated. They trigger anti-dilution provisions and create significant dilution for founders and employees.
Why Down Rounds Hurt
Beyond the psychological impact, down rounds have mechanical consequences. Anti-dilution provisions give previous investors more shares. The option pool may need refreshing at the new lower price. Employee options may be underwater (strike price above current value).
Avoiding Down Rounds
Don't raise at inflated valuations you can't grow into. Extend runway to avoid raising in bad conditions. Consider alternative financing (debt, revenue-based) to bridge to better times. If unavoidable, negotiate to minimize anti-dilution impact.
Formula
Down Round = New Valuation < Previous Post-Money Valuation
Dilution impact amplified by anti-dilution adjustments for previous investors.
Example
Down round impact:
- Series A: $10M post-money valuation
- Series B (down round): $8M pre-money valuation
Effects:
- New investors get more ownership per dollar
- Anti-dilution triggers for Series A investors
- Founders and employees get diluted more heavily
- Employee options may be underwater