Down Round

Start-ups and private companies typically hope each funding round will be at a higher valuation than the last, reflecting their progress. A down round signals that the company's value has fallen, often because growth was slower than expected, market conditions worsened or earlier valuations were too optimistic.

For example, a company raised money at 2.00 per share two years ago, valuing it at 200,000,000. It now raises money at 1.20 per share, a valuation of about 120,000,000 before the new investment.

Down rounds dilute existing shareholders significantly, since more shares must be issued to raise the same amount. They may trigger anti-dilution protection for earlier investors, shifting further dilution onto founders and employees. Employee stock options may become worth less than their exercise price, hurting morale and retention.

Despite these drawbacks, a down round can be better than running out of cash. Down rounds became more common in 2022 and 2023, after many start-ups had raised money at very high valuations in 2021. The opposite is an up round, and a round at the same price is a flat round.