Down rounds

A down round is a priced equity financing where the price per share is lower than the previous round (equivalently: pre-money below the last post-money, adjusting for share count). Existing preferred holders typically have anti-dilution protection that gives them more as-converted shares. Common and employees absorb more of the dilution. Formulas live in anti-dilution.

Effects beyond math: employees compare "I joined at a $200M story" to an $80M round; options struck off the old 409A sit underwater; offers need larger grants or cash; the next raise is often easier after a clean reset than after fake flat terms nobody believes.

Walking through it

Setup, fully diluted:

Series A was $4.00/share → post-money 10M × $4 = $40M. Series B raises $5M at $2.00/share. New Series B shares = $5M / $2 = 2,500,000.

Broad-based weighted average, using a simplified base A = 10,000,000 (your charter's "A" changes the cents):

CPA_old = $4.00
B = 5,000,000 / 4.00 = 1,250,000
C = 5,000,000 / 2.00 = 2,500,000
CPA_new ≈ 4.00 × (10,000,000 + 1,250,000) / (10,000,000 + 2,500,000)
        ≈ 4.00 × 11.25 / 12.50
        ≈ $3.60

Series A conversion price falls from $4.00 to ~$3.60, so they receive additional as-converted shares in the ratio 4.00/3.60 ≈ 1.111× — about 11% more. Full ratchet would set CPA_new = $2.00 and roughly double Series A — far more punitive to common, and rare outside distressed deals.

Ignoring extra anti-dilution shares for a moment:

New total     ≈ 10,000,000 + 2,500,000 = 12,500,000
Series B      = 2,500,000 / 12,500,000 = 20%
Founders      = 6,000,000 / 12,500,000 = 48%   (were 60%)
Pool          = 1,500,000 / 12,500,000 = 12%   (were 15%)

Add anti-dilution issuance and common shrinks further. Employees struck at a $4.00-related 409A may be out of the money versus a $2.00 round. The board may reprice or grant refreshers so retention does not collapse.

Common mistakes

• Reading only the new investor's 20%. Anti-dilution takes more from common than that headline.
• Skipping a refresh for underwater grants. Survival with a hollow option plan is how people leave.
• Pretending a structured flat is kinder. Employees and the next lead still do the math. See structured rounds.

Check yourself

Price falls from $4.00 to $2.00 and the company sells $5M. About what does broad-based WA do to a $4.00 conversion price if A is 10M?

It moves it to about $3.60 — not all the way to $2.00.

An engineer was 0.4% on 10M shares. After 2.5M new shares, before anti-dilution, what is the stake?

40,000 / 12,500,000 = 0.32%.

Key takeaways

• A down round is a cheaper price per share than last time, not just "a hard raise."
• Weighted-average anti-dilution gives preferred extra as-converted shares; common funds that extra.
• Ownership % often falls less than the headline valuation story; paper value of common can fall a lot.
• Plan refresh or reprice if you want people to stay.

Further learning

Anti-dilution protection