Price & valuation
Down round
A financing priced below the company's previous round, which dilutes existing holders disproportionately and typically triggers anti-dilution adjustments in favour of earlier preferred investors.
In plain English
A down round is what happens when a company needs money and the market will not pay what it paid last time. The causes are ordinary: growth slower than the previous valuation assumed, a sector re-rating that has nothing to do with the company, or a round raised at a peak that the business has not yet grown into.
The mechanical consequences are severe. New money buys more of the company per dollar, so everyone existing is diluted harder than in an up round. Any anti-dilution provisions in earlier preferred shares adjust their conversion price downward, giving those investors extra shares — dilution that falls on ordinary shareholders, meaning founders, employees and any angel holding ordinary shares. If there is a pay-to-play provision, investors who do not put in fresh money may see their preferred shares forcibly converted to ordinary.
The human consequences are worse and are frequently underestimated. Employee options struck at the old price are worthless, which triggers departures precisely when the company can least afford them. Founders whose ownership is halved lose motivation. The narrative damage makes the following round harder.
None of which means a down round is the wrong decision. A company that raises at a lower price and survives is worth more than one that refuses on principle and runs out of cash. Flat and down rounds are a normal part of long company histories, including several that ended very well.
What it means for your cheque
For an angel holding ordinary shares, a down round is where you discover what your position was really made of. You will be diluted by the new money, diluted again by the anti-dilution ratchet benefiting the preferred holders, and you will have no protection of your own. It is the single strongest argument for taking the same share class as the lead when you can.
The practical question is whether to follow your money. Investing in a down round means buying at a lower price with better information than you had originally — which is, in isolation, an attractive proposition. Judge it as a fresh investment at today's price, not as a rescue of the money you have already spent. That earlier money is gone either way.
Do the arithmetic
A weighted-average ratchet on a down round
A company raised at $20m post-money. Eighteen months later it raises $4m at a $12m pre-money valuation. The Series Seed preferred holders have broad-based weighted-average anti-dilution; you hold ordinary shares.
| Previous round price | $2.00 per share |
|---|---|
| New round price | $1.20 per share |
| Adjusted conversion price for the preferred | about $1.72 under a broad-based weighted average |
| Extra shares issued to the preferred holders | roughly 16% more than they held |
| Who is diluted by those extra shares | ordinary shareholders — founders, employees, and you |
| Your position, before the ratchet | diluted by the new money alone |
| Your position, after the ratchet | diluted twice |
The preferred holders were made substantially whole and you paid for part of it. Under a full ratchet rather than a weighted average the effect would have been dramatically worse.
At the table
What to negotiate
- Before the down round: ask whether the company can reach a milestone that supports a flat round instead, and whether a bridge from insiders is available.
- Ask which anti-dilution formula applies to existing preferred. Broad-based weighted average is standard and much gentler than a full ratchet.
- If there is a pay-to-play provision, work out whether you can participate before deciding your position.
- Push for the option pool to be refreshed and for employee options to be repriced — a demoralised team destroys more value than the dilution does.
- Consider whether the round should be structured as a recapitalisation with a clean cap table rather than another layer on a strained one.
Down round: common questions
Does a down round always trigger anti-dilution?
Should I invest in a down round of a company I already back?
Is a flat round bad?
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