Down Round
A down round is a funding round in which a company raises money at a lower valuation than its previous round, so that existing shareholders are diluted more than they expected and earlier investors' anti-dilution rights may be triggered. It is the usual outcome for a company that raised at the top of a cycle and grew more slowly than the price assumed.
- Also known as
- Down-round financing, Flat round, Recapitalisation
- Used at
- any round where the price per share is below the last one; "flat" when it is the same
- Triggers
- anti-dilution adjustments for earlier preferred shares — weighted average in most term sheets, full ratchet in a few
- Typical price cut in 2023–25 fintech rounds
- 30–60% from the previous valuation
- Alternatives
- a bridge note or convertible, an inside round, a structured round at the old headline with harsher terms
- Parties
- the company, new investors, existing investors and — most affected — founders and employees
How a down round works in practice
A company raised €15m at a €100m post-money valuation in 2022, planning to reach €10m of revenue by 2024. It reached €5m. It has nine months of runway and needs €10m. New investors will pay a price that today's numbers support — perhaps €40m — and the round is a down round. Everyone is diluted more than the last plan assumed, and two mechanisms decide by how much.
The first is the price itself. €10m at €40m pre-money buys 20% of the company; the same money at the old valuation would have bought 9%. The second is anti-dilution. The 2022 investors' preferred shares carry a clause that adjusts their conversion price when shares are sold below what they paid: with a weighted-average clause, the adjustment reflects how much money was raised at the lower price, and moves their percentage by a point or two; with a full ratchet, their conversion price resets to the new round's price as if they had invested at it, and can hand them a majority. Founders and employees, who hold ordinary shares with no such protection, absorb all of it.
Companies avoid the word by structuring around it: a round at the old headline valuation with a 2× participating preference, a convertible note that defers the price, a bridge from insiders. Each of these is a down round in economic terms with a different name, and each adds to the preference stack that will decide what the founders receive at exit. A clean down round at an honest price, with the option pool refreshed, often leaves the team better off than a flattering structure.
Example
A lending platform raised €15m at €100m post-money with weighted-average anti-dilution. It now raises €10m at €30m pre-money (€40m post). The new investors take 25%. The 2022 investors' conversion price falls from €10 to €8.24 per share under the weighted-average formula, lifting their stake from 15% to about 17% on the new cap table; the founders' 55% becomes 40%. Under a full ratchet the 2022 investors' conversion price would have reset to €3.75 and their stake to about 32%, leaving the founders with 28%.
Common mistakes
- Signing a full-ratchet anti-dilution clause in the good round because "it will never apply". - Choosing a structured round to avoid the headline, and paying for it in the preference stack at exit. - Waiting until three months of runway remain, when the price is set by the company's need rather than its prospects. - Forgetting the employees, whose options are now under water, and losing them. - Not resetting the option pool, so the team that has to deliver the recovery has no stake in it.