A Down Round is a financing event in which a company raises capital by issuing new shares at a lower valuation than in a previous funding round.
In simple terms, it means the company is now considered less valuable than before — which can signal declining investor confidence, poor performance, or changing market conditions.
In Series A, a startup raised funds at a ₹100 crore valuation.
A year later, in Series B, it raises more funds — but at a ₹75 crore valuation.
This Series B is called a Down Round because the valuation went down.
Reason | Explanation |
---|---|
Business Underperformance | Revenue or user growth did not meet expectations. |
Economic Conditions | Market slowdown or sector-wide funding crunch. |
Overvaluation in Previous Round | Prior investors may have paid too much. |
Cash Burn Issues | High expenses with little traction may push a company to raise money at lower terms. |
Share Dilution
New investors get a bigger chunk of the company for less money, which dilutes existing shareholders’ equity.
Lower Morale
It can negatively impact employee morale, especially if they hold stock options that now seem less valuable.
Investor Confidence
A down round might indicate red flags, making it harder to attract future funding.
Triggering Anti-Dilution Clauses
Existing investors may have anti-dilution protections, which give them additional shares to maintain their value — worsening dilution for common shareholders.
Many venture capital investors include anti-dilution clauses in their term sheets. The most common types are:
These clauses soften the impact for earlier investors, but increase dilution for founders and employees.
Type | Definition |
---|---|
Down Round | New funding at a lower valuation than last round |
Flat Round | New funding at the same valuation as last round |
Up Round | New funding at a higher valuation than last round |