Down-Round Financing

Venture funded businesses often need to keep going back to investors to seek multiple rounds of funding as business grows. All is well so long as the business is increasing in value and everyone is benefiting, but when projections do not turn out to be what the initial VCs and the founders thought they would be, subsequent rounds of funding often get raised at lower valuations. Down-rounds aren't fun, they are painful, involve difficult negotiations with initial investors, but are a reality every venture investor and entrepreneur needs to deal with particularly if business conditions aren't the easiest.


This paper looks at the math and provides an Excel based model to understand the calculations for price-based anti-dilution provisions. While the math is easy, the real purpose of doing this exercise is to allow an understanding of how different variables affect the future shareholding pattern after a down-round, particularly the founder's holding after a down-round, as that significantly affects motivation and incentives, and also how losses in value get shared between the entrepreneurs and the VCs. Down-rounds, or subsequent investments at prices lower than that paid by earlier investors, often trigger in price-based anti-dilution provisions that are intended to protect the prior round investors from a dilution in their percentage of ownership or value in the venture.

Here is the item in The mechanics of down-rounds.

And here is the Excel file: Excel model for down-rounds article