Cram-Down

A cram-down is a financing where a distressed company accepts capital on terms that heavily favor new investors, severely diluting existing shareholders — particularly common holders. The new round may include full-ratchet anti-dilution, high liquidation preferences, or pay-to-play provisions that convert non-participants' preferred shares to common, compressing their economic value to near zero.

Cram-downs happen when a company is out of options: it needs capital to survive, existing investors have exhausted their support, and new investors can name their price. The alternative — no financing — is bankruptcy, so existing shareholders accept the cram to preserve some option value.

Illustrative example: a company burning $3M/month has 90 days of runway. No existing investors will bridge further. A new investor offers $15M at a $50M post-money valuation, but with 3× non-participating liquidation preference and a full ratchet. The prior round was at $200M — a 75% step-down. Founders and employees who don't exercise options are effectively wiped out economically unless the company ultimately exits at a multiple of the new preference stack.

The edge the pros know: in a cram-down, the "headline valuation" of $50M is near-meaningless for common holders. What matters is the economics of the cram-down structure. Secondary buyers who see a cram-down in a company's cap table history should model how much each share class receives in various exit scenarios — they may find that common shares have very little economic value until exit exceeds the cumulative preference stack by a significant margin.