What is down round ?
Akash Bagrecha
Co-Founder at Jordensky | Simplifying Accounting, Taxes, E-Commerce, and Company Setups in India
What is a Down Round??
A down round occurs when a company raises funds, but the valuation of the company before the investment is lower than the valuation after the investment.?
Situation :?If in March 23, you raised INR 1 Mn with a post-money valuation of INR 8 Mn, but in April 24, you raised funds at a pre-money valuation of INR 6 Mn – that’s a down round.
What Triggers a Down Round??
Down rounds can happen due to various reasons like internal legal issues, missing revenue targets, or increased competition.?
Sometimes, even if your company is doing well, a down round might be necessary due to overall market conditions.
In other words, a down round doesn’t have to signify that something is terribly wrong at your company. Instead, it can mean that you’re fundraising in a time when valuations are taking a hit, across.
Avoiding a Down Round?
Founders can steer clear of down rounds by reducing expenses. This might involve scaling down the team, focusing on essential projects, or cutting down unnecessary costs.
How will down round Impact on Stakeholders
Previous Investors:?If your company’s valuation drops, existing investors might have the right to buy more shares at the lower price to maintain their ownership percentage. (if anti-dilution clause kicks in)
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Employees:?Down rounds can dilute the ownership of common stock holders. It’s important to communicate why this is happening to your team.
You can read detailed blog here https://www.jordensky.com/blog/the-ups-and-downs-of-up-rounds-and-down-rounds-understanding-the-impact-on-your-startup
Post-Down Round Strategy?
After a down round, it’s crucial to manage cash flow efficiently. If growth slows down, creating a conservative budget and exploring various scenarios can help avoid the need for fundraising too soon in the future.
In essence, while down rounds may seem challenging, they can be managed effectively with careful planning and strategic decision-making.
Stay financially savvy!,?
Akash
In case you wish to avail free consultancy on startup and how to manage your finances you can connect with me at akash@jordensky.com