Down round

What it means

A down round is a funding round in which a startup raises money at a lower valuation than in the previous round. If investors previously valued the company at 10 million euros and the new round is priced at a pre-money valuation of 6 million, it is a down round.

The cause is usually slower growth than expected, a weaker market, higher interest rates or an overly optimistic earlier valuation. The company needs money to survive, and new investors will only come in at a lower price per share.

A down round causes heavy dilution of founders and earlier investors and can trigger anti-dilution protection clauses. It also hurts team morale, because option plans such as an ESOP may lose their value.

How it works in practice

Anti-dilution protection shields earlier investors by issuing them additional shares or adjusting their conversion ratio. Under full ratchet their price is reset entirely to the new round, while under weighted average it is adjusted only partly, which is more favourable to founders.

New investors in a down round often demand tougher terms in the term sheet, such as a higher liquidation preference, more board seats or veto rights. Founders should assess how these terms affect their proceeds in a future sale.

To retain the team after a down round, companies often refresh option plans, for example by lowering the exercise price or granting new options. Tax and accounting consequences and the consent of existing investors must be taken into account.

What to watch out for

A down round is not always the end. Many successful companies have gone through a period of lower valuation and grown later. Running out of money without funding is usually worse than a lower valuation, so it is important to start fundraising in time, not in the last few months of runway.

Alternatives include bridge financing from existing investors, a convertible loan or cost cuts to extend the runway. Each option carries its own risks, and founders should compare their impact on ownership and control.