Down Round
A funding round where the company's valuation is lower than the previous round.
Definition
A down round occurs when a company raises capital at a lower valuation than its previous round. This usually means the company has underperformed, or market conditions have deteriorated. Down rounds dilute existing shareholders significantly, especially if anti-dilution protections kick in for preferred stockholders, pushing even more dilution onto common stockholders (employees).
Why it matters
A down round can dramatically reduce the value of your equity. Worse, anti-dilution provisions may further dilute common stockholders to protect preferred investors. Your options may end up underwater if the new 409A price drops below your strike.
Example
A company raised its Series B at $200M but struggles and raises a Series C at $100M. The price per share drops from $10 to $5. An employee with options at a $8 strike price now holds underwater options.