Down round

A down round occurs when a company raises new equity capital at a pre-money valuation that is lower than the post-money valuation of its previous round. The incoming investors effectively pay less per share than earlier investors paid, which dilutes all existing shareholders — founders, employees with options, and prior investors — and resets the company's valuation lower on paper.

Down rounds are most commonly triggered by missed growth targets, adverse market conditions, a sector-wide correction, or a deteriorating cash position that forces the company to raise on whatever terms it can obtain. They are psychologically difficult for founders and teams because they represent an acknowledged step backward in perceived value.

Anti-dilution provisions are the mechanism through which existing investors protect themselves in a down round. Under a full-ratchet adjustment, prior investors are repriced as if they had invested at the new, lower price — maximising protection but severely diluting founders. Broad-based weighted average anti-dilution is more founder-friendly, adjusting the conversion price gradually based on the size and terms of the down round. Most Indian term sheets use broad-based weighted average.

Down rounds also have secondary effects: ESOP grants made at earlier (higher) strike prices are now underwater, reducing retention value for employees. The company's narrative with customers, partners, and future recruits is affected. Founders navigating a down round should negotiate hard on anti-dilution mechanics in earlier rounds, maintain transparent communication with the cap table, and where possible structure the new round with pay-to-play provisions that encourage existing investors to participate rather than free-ride on anti-dilution protections.