Down Round
A funding round where a company raises capital at a lower valuation than its previous round — signaling that the company's value has decreased.
What is Down Round?
A down round occurs when a startup raises money at a valuation lower than the previous round's post-money valuation. If you raised your Series A at a $30M post-money and your Series B is priced at $20M pre-money, that's a down round.
Down rounds are painful for everyone. Existing investors see their ownership diluted more than expected. Founders and employees with stock options may find their equity worth less on paper. And the market signal is negative — it suggests the company hasn't grown enough to justify its previous valuation.
Down rounds can trigger anti-dilution provisions in earlier investors' preferred stock, which protects their ownership at the expense of common shareholders (usually founders and employees). This is called "ratchet" or "weighted average" anti-dilution.
Why it matters
Down rounds are one of the worst outcomes in fundraising because they destroy morale and reset expectations. Employees who joined for equity may find their stock options underwater (worth less than the exercise price).
The best defense against a down round is realistic valuation expectations and strong financial management. If your current valuation is $30M post-money, you need to show sufficient growth to justify a higher price at your next round.
Example
You raised Series A at $25M post-money. Two years later, growth has slowed and the market has cooled. You need to raise Series B, but investors will only offer $18M pre-money. This is a down round — $18M pre-money is below your $25M Series A post-money. Anti-dilution clauses may adjust Series A investors' conversion price, increasing their ownership and further diluting founders.
Common mistakes
- 1Raising at an inflated valuation in a hot market, making it nearly impossible to avoid a down round later
- 2Not understanding the anti-dilution provisions in your previous round's term sheet
- 3Avoiding a necessary down round by not raising at all, which can be even more dangerous if you run out of cash
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