Glossary - Down Round
A down round refers to a financing event where a company raises capital by issuing new shares at a valuation lower than the valuation applied in its previous financing round. This often implies that the company's market value has decreased since the last round of funding, leading to the issuance of shares at a lower price.
Also known as
- Discounted Round
- Bridge Round
Use cases examples
- Term Sheet: The Series B round will be considered a down round, as the pre-money valuation of $8 million is less than the $10 million valuation from Series A.
- Shareholders Agreement: In the event of a down round, existing shareholders are subject to dilution unless they participate in the new investment round under pre-emptive rights.
Considerations for investors
- Investors should consider the implications of anti-dilution provisions, which may affect their own shareholding in the event of a down round.
- A down round might indicate underlying business challenges or market conditions that could risk the investment's return.
Considerations for founders
- Founders should be aware that a down round can dilute their ownership percentage significantly, potentially reducing their control over the company.
- The perception of a down round can be harmful to a company's brand and employee morale, possibly affecting future hiring and retention.
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