Glossary · Fundraising process · Updated
A down round is a financing round priced below the previous one. Beyond the mechanically larger dilution, it triggers existing investors' anti-dilution clauses, which amplifies the ownership founders lose.
The double hit is what founders discover too late. Lowering the valuation dilutes more for the same amount raised, which is arithmetic. But anti-dilution clauses signed in earlier rounds add a second layer: existing investors receive free additional shares to compensate for the drop, and those shares come out of the founders' stake.
The effect goes beyond equity. A down round hits team morale, and options can become worthless because their strike was set at the previous valuation. It usually has to be handled in parallel with a fresh grant, or key people leave at the worst possible moment.
It is not necessarily a disaster. A down round that is owned, explained, and puts the company back on a fundable path beats a round held artificially at an unsustainable price, or shutting down. The 2022 and 2023 market corrections made the practice far less stigmatised than it used to be.
Example: a down round with anti-dilution
A seed investor put €1M in at a €10M post-money, for 10%. The next round is priced at a €5M post-money.
| Seed post-money valuation | €10,000,000 |
|---|---|
| Seed investment | €1,000,000 for 10% |
| New round valuation | €5,000,000 post-money |
| Valuation drop | −50% |
| Without anti-dilution | the seed investor keeps 10% going into the round |
| With full ratchet anti-dilution | their entry price is recalculated at €5M |
| Recalculated seed investor stake | 20% instead of 10% |
| Where the extra 10 points come from | the founders' holding |
Founders lose ten points of equity before the new investor even arrives. That is why the anti-dilution clause, often rushed through at the end of a term sheet negotiation, deserves as much attention as the valuation itself.
The common mistake
Delaying a down round hoping things improve. Every month of waiting burns cash and reduces negotiating power, so the round eventually happens at an even lower valuation on harsher terms.
Frequently asked questions
What causes a down round?+
A new round priced below the previous one, usually because growth fell short of plan, the market turned, or the previous round was priced too high. The three causes often combine.
How do you limit the damage of a down round?+
By negotiating a weighted average broad-based anti-dilution clause rather than a full ratchet in the first round, and by issuing a fresh option grant at the time of the down round, without which key people are left holding worthless instruments.
Related terms
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