Fundraising
What is a down round?
Quick Answer
A down round occurs when a company raises funding at a lower valuation than its previous round. It signals the company hasn't met growth expectations and triggers anti-dilution provisions that can significantly dilute founders.
Detailed Answer
A down round is a funding event where the pre-money valuation is lower than the post-money valuation of the previous round. It's one of the most consequential events in a startup's lifecycle.
Example: Company raised Series A at $50M post-money, then raises Series B at $30M pre-money → down round.
Consequences: - **Anti-dilution triggers** — Previous investors' conversion prices adjust downward, diluting founders and employees - **Morale impact** — Employee options may be underwater (exercise price > current value) - **Signal risk** — Future investors may perceive weakness - **Board dynamics** — Power shifts toward investors
When down rounds happen: - Company missed milestones between rounds - Market conditions deteriorated (2022-2023 saw many) - Previous round was overpriced - Revenue growth stalled or reversed
Mitigating strategies: - **Structured rounds** — Use guarantees or ratchets instead of a straight down round - **Pay-to-play** — Require existing investors to participate or lose preferences - **Bridge financing** — Buy time with convertible notes at a discount - **Recap and restart** — In extreme cases, reset the cap table
Perspective: Down rounds aren't necessarily fatal. Many successful companies (Foursquare, Jawbone, even Facebook during 2008) raised down rounds and recovered.
Related Questions
What is dilution in startup funding?
Dilution is the reduction in an existing shareholder's ownership percentage when a company issues new shares, typically during fundraising rounds. Founders typically experience 15-25% dilution per funding round.
What is a cap table?
A cap table (capitalization table) is a spreadsheet or document that shows a company's equity ownership structure — who owns what percentage, including founders, investors, employees with options, and any convertible instruments.
How much equity should you give investors?
Standard dilution is 15-25% per funding round. Seed rounds typically sell 15-20% equity, Series A sells 20-30%. Founders should retain at least 50% through Series A to maintain control and motivation.
What is the difference between pre-money and post-money valuation?
Pre-money valuation is a company's value before new investment; post-money is the value after. Post-Money = Pre-Money + Investment Amount. A $10M pre-money with $2M invested = $12M post-money, giving the investor 16.7% ownership.
The operating system for private capital.
Archstone runs the back office for venture, PE, real estate, and credit funds — LP reporting, capital calls, portfolio tracking, and fund accounting, in one platform. Now in alpha.