A down round is a funding round priced at a lower valuation than the company's previous round, meaning existing shareholders' stakes are worth less per share than before, even though the company is raising more money.
Down rounds trigger anti-dilution protection for existing preferred shareholders, which adjusts their effective price to soften the impact on their ownership, at the direct expense of common shareholders and founders, who absorb the difference instead.
A down round isn't necessarily a sign a company is failing. Market conditions can shift valuations across an entire sector regardless of how an individual company is performing, but it does reset expectations for everyone on the cap table and is worth understanding fully, including the anti-dilution mechanics, before agreeing to one.
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