Glossary - Washout Round
A washout round, also known as a down round, refers to a financing event where new investment is made into a company at a valuation lower than the preceding round of financing. This often results in substantial dilution of equity for existing shareholders, including founders and earlier investors. Such rounds are typically executed to provide a struggling company with necessary capital to continue operations, pivot its business model, or achieve milestones that would enable future fundraising at higher valuations.
Also known as
- Down Round
Use cases examples
- Term Sheet: The Series C financing round will be a washout round, issuing shares at a lower valuation than the Series B, resulting in significant dilution for existing shareholders.
- Shareholder Agreement: In accordance with the terms agreed upon, this washout round grants new investors preferred shares, offering them protections against future dilution.
Considerations for investors
- Investors considering participating in a washout round should conduct thorough due diligence to understand the company's path to recovery or growth post-financing.
- Investors should consider the implications of a washout round on existing shareholder relationships and the potential for future fundraising.
Considerations for founders
- Founders should be aware of the potential loss of control and ownership dilution that may occur in a washout round.
- Negotiating anti-dilution provisions in earlier financing rounds can provide some protection against the impacts of a washout round.
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