Cramdown Round

A Cramdown Round is an extremely dilutive funding round—typically a down round at a dramatically lower valuation—where new investors acquire a controlling or near-controlling stake in the company, severely diluting existing shareholders (founders, employees, and prior investors) who cannot or choose not to participate. Cramdowns often occur when a company is running out of cash and has limited options: the existing investor base is unwilling or unable to provide additional capital, market conditions make fundraising at anything close to the prior valuation impossible, and a new investor offers capital on punitive terms. Cramdown terms may include full-ratchet anti-dilution adjustments for the new investors, elimination or restructuring of existing preferred stock preferences, cancellation and reissuance of the option pool, and pay-to-play provisions that convert non-participating preferred stock to common. The result can reduce founder ownership from 20-30% to 1-5% and existing investor ownership from 50%+ to single digits. While brutal, a cramdown is preferable to the company shutting down entirely, as it preserves some (reduced) value for all stakeholders.