Down Round

A down round occurs when a company raises capital at a per-share price lower than its prior round. It is the opposite of an "up round" and the inverse of a "flat round" (where the price is unchanged). Down rounds signal that the company's growth trajectory, market conditions, or competitive position has weakened since the last raise.

Down rounds trigger anti-dilution provisions in most preferred investment documents. Full-ratchet anti-dilution reprices earlier investors' preferred shares to the new, lower price, protecting their economics at the cost of devastating dilution for common shareholders. Weighted-average anti-dilution (more common) adjusts the conversion price proportionally, diluting common but less severely.

Illustrative example: Company A raised its Series B at a $500M valuation. 18 months later, revenue growth has slowed and it needs capital. New investors will only price the Series C at $350M — a 30% discount. Series B holders with weighted-average anti-dilution adjust their conversion ratio. Common holders (employees, early angels) suffer the dilution with no protection. The 409A common FMV drops accordingly.

The gotcha: down rounds often trigger "pay-to-play" provisions that penalize non-participating investors. If existing investors don't put new money into the down round, they may see their preferred shares converted to common — stripping all preferences. The result is a tiered structure where participating investors retain preferences while holdouts are effectively cram-downed into common.