Down Round

A down round is a financing in which a company sells shares of capital stock at a price per share lower than the price in a prior financing round.¹ Down rounds occur when a company's growth has slowed, market conditions have deteriorated, or earlier valuations proved too high relative to the company's financial performance.²

Mechanics

Valuation Comparison

A company's valuation is set at each priced funding round based on the price per share multiplied by the fully diluted share count. In an up round, new investors pay a higher price per share than the previous round. In a flat round, they pay the same price. In a down round, they pay less.¹ The distinction from a public company stock decline is significant: venture-backed companies have illiquid stock, unprofitable operations, and workforces whose confidence can be materially damaged by a declining per-share price signal.¹

Anti-Dilution Provisions

Most investors in venture-backed companies hold preferred stock with anti-dilution provisions that activate in a down round.¹ These provisions adjust the conversion ratio of preferred stock to common stock, increasing the number of common shares each preferred share converts into — without issuing additional preferred shares or increasing the liquidation preference.¹ This protects the investor's percentage ownership at the expense of common stockholders, typically founders and employees.

Two main types exist:

Full ratchet gives existing preferred shareholders the right to convert at the new, lower price as if they had invested at that price from the start. If an investor paid $10 per share and a down round occurs at $5 per share, each preferred share becomes convertible into two common shares.¹ Full ratchet provides the strongest investor protection but imposes the heaviest dilution on founders.⁶

Broad-based weighted average adjusts the conversion price based on both the magnitude of the price reduction and the size of the down round relative to total capitalization.¹ A smaller down round triggers a smaller adjustment than a large one at the same reduced price. This approach is significantly more common in practice than full ratchet.⁷ The standard formula is: CP2 = CP1 × (A + B) ÷ (A + C), where A is shares outstanding before the down round, B is the number of shares that could be purchased at the original conversion price using the down-round proceeds, and C is the actual number of new shares issued.¹

Effect on Cap Table

When anti-dilution provisions trigger, founders and option holders (common stock) absorb the dilution.¹ Existing preferred investors see their conversion ratios increase, maintaining or improving their ownership percentage. New investors in the down round purchase at the reduced price. Venture capital funds may also be required to write down the carrying value of their investment in financial statements, which affects LP reporting and can influence the fund's own fundraising.¹

Historical Context

Dot-Com Bust (2000–2002)

The collapse of the dot-com bubble in 2000 produced a wave of down rounds across internet companies. Many companies that had raised at peak 1999–2000 valuations found IPO markets closed and later-stage capital unavailable, forcing them to accept sharply reduced valuations or shut down entirely.

2022–2023 VC Correction

Rising interest rates beginning in early 2022 compressed technology company multiples globally, closing IPO markets and reducing late-stage capital supply.² In the first seven months of 2022, U.S. companies raised only $4.3 billion in IPOs, compared to a record $102 billion in the same period of 2021.² PitchBook recorded 81 U.S. down rounds in 2022 alone.²

Notable Examples

Klarna raised a down round in July 2022 at a valuation of $6.7 billion, down from $45.6 billion in June 2021 — a reduction of over 85%.²³ The Swedish buy-now-pay-later firm subsequently cut its workforce and restructured operations.

Instacart cut its internal valuation multiple times through 2022, reducing from a peak of $39 billion to approximately $24 billion by March 2022, a reduction of approximately 38%.⁴ The company continued marking down its valuation through mid-2023 before its IPO.⁵

Stripe reportedly reduced its internal valuation by approximately 28% in 2022.²

BlockFi, the cryptocurrency lender, saw its valuation fall by approximately 67% before filing for bankruptcy in November 2022.²

Implications

For Founders

Down rounds signal to employees and future investors that prior valuations were not sustained.¹ Employee stock options granted at higher strike prices may be underwater — worth less than their exercise price — reducing retention incentives. Companies sometimes reprice option grants or issue new options at the lower post-round price, subject to board and shareholder approval. Anti-dilution adjustments reduce the percentage of the company that founders and common stockholders own.¹

For Existing Investors

Investors with anti-dilution provisions increase their conversion ratio, but only at exit do the additional common shares translate into cash.¹ Funds must write down the carrying value of their investment in LP reporting, which can affect the fund's ability to raise its next fund.¹

Alternatives

Companies sometimes avoid a formal down round by raising a bridge round on convertible notes or SAFEs that defer valuation to the next priced round.¹ Other approaches include negotiating investor-favorable terms beyond price — such as higher liquidation preferences, accruing dividends, or participating preferred structures — to attract capital without crossing a lower per-share price threshold.¹