Down Rounds
A down round is a financing where a company raises capital at a lower valuation than the previous round, often forcing repricing, dilution, and structure changes. Allocators evaluate how GPs handle down rounds because it reveals discipline, governance strength, and ability to protect ownership without distorting marks.
Down rounds are a normal part of venture cycles when growth expectations reset or capital becomes scarce. They create second-order effects: employee morale, option refreshes, liquidation preference stacks, investor signaling, and governance renegotiation.
From an allocator perspective, down rounds are not just valuation events. They are stress tests of manager behavior.
How allocators define down-round risk
They assess:
- Cause: operational failure vs market multiple compression
- Structure: liquidation preferences, pay-to-play, resets
- Ownership impact: dilution and reserve deployment
- Governance: board control and protective provisions
- Signaling: market perception and follow-on financing probability
- Portfolio impact: correlation of down rounds across themes/vintages
Allocator framing:
“Does the GP manage repricing with realism and protect the portfolio, or chase mark preservation?”
What slows decisions
- managers unwilling to disclose down-round history
- opaque mark methodologies and delayed write-downs
- aggressive bridge rounds that postpone reality
- reserve policies used to prop up weak companies
Common misconceptions
- “Down rounds mean the company is dead” → sometimes it’s a reset that enables survival.
- “Bridges are always better” → bridges can worsen preference stacks and future optionality.
Key allocator questions
- What is your policy on marking down versus bridging?
- How do you decide whether to support a company post-reset?
- How do you manage liquidation preference stack risk?
- What is the effect on employee retention and hiring?
- How often did down rounds occur by vintage and sector?
Key Takeaways
- Down rounds are cycle realities; governance and discipline determine outcomes
- Preference stacks and signaling can destroy long-term optionality
- Transparency and a consistent policy build allocator confidence