Down Round
A down round is a scenario where the value of a business at a time of investment is below the value of the same business during a previous period or financing round.
What is a down round?
A down round occurs whenever a company raises financing at a lower valuation than previous rounds.
How do down rounds occur?
Down rounds can occur due to several factors. The most common is when fundamentals of the business change, like profitability metrics decreasing or expenses increasing. Another common reason for down rounds is that the macro environment can shift, decreasing the value of the company.
What happens to the value of my shares following a down round?
The value of the shares will most likely decrease following a down round. The degree of the decrease depends on many factors, but ultimately comes down to what other investors are willing to pay for the shares.
Is there anything I can do to protect myself from a down round?
The only thing you can do to protect yourself from a downround is to sell your shares in advance of the down round. As always with investing, there is the risk that your investments will be volatile and not only experience price increases. This is okay, and it is up to you to determine how much risk you are willing to take.
