Last updated: 31 October 2026
A down round is a financing at a lower valuation than the previous round. It cuts founders’ and employees’ stakes, can trigger investor anti-dilution rights, and leaves some employee options underwater.
What is a down round?
A down round is a financing at a lower valuation, meaning a lower price per share, than the company’s previous round. It is also what activates price-based anti-dilution protection. In plain terms, the company is raising money on a less favourable valuation than before. That single change sets off several mechanical effects for existing shareholders, because the new shares are cheaper and the ownership split changes.
What happens to founders?
Founders are diluted twice in a down round. First, they are diluted by the new shares issued to the new investors. Second, where earlier investors hold anti-dilution rights, founders are diluted again by extra conversion shares issued to those investors. The size of that second effect depends on the anti-dilution formula.
There are two types of anti-dilution. Full ratchet means the conversion price drops all the way to the new lower price, which is much more severe. Weighted average means the adjustment takes account of both the price and the size of the down round. Broad-based weighted average is the market standard and is more founder-friendly.
The worked example below shows the difference between a down round and a flat round. It assumes no anti-dilution adjustment and no option pool top-up. After a Series A at a $40m post-money valuation, the founder owns 20%, worth $8m. In Series B, the company raises $10m. If the pre-money valuation is $30m, the post-money valuation is $40m, the new investors receive 25%, and the founder falls to 15%, worth $6m. If the pre-money valuation is $40m, the post-money valuation is $50m, the new investors receive 20%, and the founder falls to 16%, worth $8m.
| Scenario | Pre-money valuation | Post-money valuation | Amount raised | New investors’ share | Founder stake and value |
|---|---|---|---|---|---|
| Series B down round | $30m | $40m | $10m | 25% | 15% ($6m) |
| Flat Series B | $40m | $50m | $10m | 20% | 16% ($8m) |
What happens to employees and their options?
A preferred stockholder’s anti-dilution right does not normally protect employee options. So employees do not usually receive the same adjustment that some investors receive. Employee options do count in a broad-based weighted average, but not in a narrow-based one.
If the new share price falls below an option’s strike price, the option is “underwater”. An underwater option has no immediate intrinsic value, because exercising it would cost more than the current share price.
Companies can use several mitigations. They may make new option grants at the lower valuation. They may exchange or reprice underwater options. They may also set up a cash bonus pool.
What can founders do?
Founders can negotiate for broad-based weighted average rather than full ratchet. They can also carve out employee option pool issuances from the anti-dilution calculation. These choices can reduce the extra dilution that comes from investor protections.
SAFEs are another instrument founders may use. They have no interest or maturity date. They convert into shares when preferred stock is sold.
Frequently asked questions
What is a down round?
A down round is a financing at a lower valuation, and therefore a lower price per share, than the company’s previous round. It activates price-based anti-dilution protection.
Why does a down round hurt founders?
Founders are diluted by the new shares and, where earlier investors have anti-dilution rights, by extra conversion shares to those investors. Full ratchet is much more severe than weighted average.
Do employee options get anti-dilution protection?
No. A preferred stockholder’s anti-dilution right does not normally protect employee options. Employee options count in a broad-based weighted average but not in a narrow-based one.
What is an underwater option?
An option is underwater when the new share price is below the option’s strike price. Companies may respond with new grants, repricing, exchanging, or a cash bonus pool.
How can founders limit damage from a down round?
Founders can negotiate broad-based weighted average rather than full ratchet and carve out employee option pool issuances.
Sources
- AngelList: anti-dilution protection
- Ledgy: anti-dilution provisions
- PwC: understanding and managing down rounds
Figures and prices were checked on 31 October 2026; check the linked sources before relying on them. This article is general information, not tax, legal or investment advice.
