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Down Round
A funding round at a lower valuation than the previous round, diluting existing shareholders.
Formula
Down round dilution example:
- Series A: $5M at $20M post (25%)
- Series B: $3M at $12M post (25%)
Without anti-dilution, Series A still owns 25%.
With full ratchet anti-dilution, Series A gets extra shares, further diluting founders.
Definition
What is a Down Round?
A down round occurs when a company raises money at a lower valuation than its previous round. If Series A was at $20M post and Series B is at $15M pre, that's a down round.
Down Round Consequences
Existing shareholders face unexpected dilution. Anti-dilution provisions kick in, further diluting common shareholders. Employee morale suffers. Future fundraising becomes harder.
Navigating Down Rounds
Be transparent with your team. Refresh employee option grants if possible. Negotiate hard on anti-dilution terms. Consider pay-to-play to clean up the cap table.
Example
Company raised Series A at $25M post-money.
Market conditions worsen. Series B available at $18M pre-money.
This is a down round (below previous post-money).
Series A has weighted-average anti-dilution.
Result: Series A gets additional shares, founders go from 50% to 38% ownership.
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