LEGAL
Raising Capital
What Is a Down Round (and Why It Can Be So Painful)?
A down round occurs when you raise money at a lower valuation than your last round. It signals reduced investor confidence, impacts morale, and may trigger investor protections that increase dilution.
Why it Matters
A down round happens when you raise money at a lower valuation than your previous round.
It’s not just a blow to ego — it can trigger anti-dilution provisions, hurt employee morale, and shake investor confidence.
Founders Checklist
Model dilution impact on founders, employees, and early investors
Understand any anti-dilution protections in past rounds
Communicate transparently with your team
Revisit option pool size to re-motivate talent
Use convertible instruments if you’re unsure about valuation
Founder Fails
Signed full-ratchet anti-dilution > got crushed in down round
Didn't re-incentivize the team > key hires walked
Tried to “hide” the down round > lost trust with new investors and employees
When to ask for Help
If you’re facing slower growth or revenue than expected
Before negotiating a lower valuation with investors
To understand anti-dilution protections in previous rounds
When communicating with existing investors or team
To assess alternatives like bridge financing or extension SAFEs
Frequently Asked Questions
Q: What causes a down round?
A: Slower growth, missed milestones, tough markets, or just over-raising at inflated valuations in earlier rounds.
Q: What happens to my cap table in a down round?
A: Everyone gets diluted — especially common shareholders. Investors with anti-dilution rights may end up owning more than expected.
Q: What’s anti-dilution protection?
A: A clause that adjusts earlier investors’ ownership if a down round occurs — usually through full-ratchet or weighted-average formulas.
Q: Can we avoid calling it a down round?
A: Not really. But you can soften the optics by raising via uncapped SAFEs, inside bridge rounds, or using flat valuations with stronger terms.