What is a down round?
A down round is a funding round priced at a lower valuation than the company's previous round — new investors pay less per share than the last round paid, which immediately dilutes everyone who owned equity before the round closed. It's the opposite of the up round every founder plans for, and it's more common than pitch decks ever admit: in tight funding markets, a large share of startups that raise again inside 18 months of a previous round do so at a flat or lower price.
The number that gets quoted publicly — 'valuation dropped 40%' — is rarely the number that matters to a founder. What matters is how much of the company you personally own after the round closes, and that depends on deal mechanics most founders never look at until they're staring at a term sheet: the anti-dilution provisions sitting quietly in every prior round's paperwork.
What causes a down round?
Down rounds cluster around a handful of causes, and most have nothing to do with a single bad decision: a broader market correction that resets valuation multiples across a sector; a company that raised its last round at a valuation its metrics hadn't earned yet and simply grew into a lower number; missed milestones — churn, a stalled PMF signal, a burn multiple that never came down — that make the original valuation impossible to defend; or a runway emergency where the choice isn't 'what price' but 'do we raise at all.'
The common thread is timing pressure. A company with 14 months of runway negotiating a valuation has leverage; a company with 3 months does not. That's why runway discipline earlier in a company's life is a down-round prevention tool, even though it looks like an unrelated metric at the time.
Anti-dilution protection: full ratchet vs. weighted average
Most preferred shares carry an anti-dilution clause that protects earlier investors when a down round happens, by adjusting their conversion price downward. Two versions dominate term sheets, and the difference between them can be the difference between a manageable dilution hit and a founder losing control of the company.
Weighted average — specifically broad-based weighted average — is the market standard today and factors in both the size of the price drop and how many new shares the down round actually issues, which keeps the adjustment roughly proportional. Full ratchet ignores round size entirely: it reprices every earlier preferred share down to the new round's price, no matter how small the new round is relative to the cap table it's adjusting.
| Full Ratchet | Weighted Average | |
|---|---|---|
| How it's calculated | Repriced instantly to the new, lower round price | Weighted by both the price drop and how many new shares are issued |
| Founder dilution | Harshest — often disproportionately large | More measured and roughly proportional |
| How common it is | Rare today, investor-favorable | Market standard (broad-based) |
| Who it protects | Only the earlier round's investor | Balances earlier and later investors |
What a down round does to your cap table
Anti-dilution adjustments come out of somewhere, and that somewhere is common stock — the founders' and employees' ownership. When earlier investors' shares get repriced downward, they effectively receive additional shares at no additional cost, and those shares are minted by diluting everyone without anti-dilution protection. A valuation drop that looks like '40% down' on a press release can translate into founder ownership dropping by a much larger share, once the adjustment finishes compounding through every earlier round with a full-ratchet or weighted-average clause.
Down rounds also tend to arrive with pay-to-play provisions, which force existing investors to participate in the new round or have their preferred shares converted to common — stripping their liquidation preference and anti-dilution rights. It's a mechanism investors use to force alignment, and it changes who actually has a say in the company's next moves.
40%
Headline valuation drop
~8%
Extra founder dilution under weighted average
20%+
Extra founder dilution under full ratchet
2
Clauses that often ride along: pay-to-play, board changes
Down round or bridge round: which protects your runway better?
A bridge round is often the alternative founders reach for specifically to avoid pricing a down round — a SAFE or convertible note that extends runway without setting a new valuation today, deferring the price question to the next priced round. It buys time to hit the milestone that justifies a higher number instead of locking in a lower one.
But a bridge only postpones the valuation conversation; it doesn't answer it. If the metrics haven't improved by the time the note converts, the bridge can convert at an even worse price than a straight down round would have set today — sometimes with its own additional discount stacked on top. Whether a bridge or a priced down round protects you better depends entirely on how confident you are that the next few months change the story.
Testing a down round scenario in Founder Runway
Founder Runway runs a 20-turn arc from Pre-Seed to Series A, and a down round is one of the sharpest lessons the simulation can teach, because the anti-dilution math plays out on your actual cap table instead of in the abstract. Run a scenario where you raise your Pre-Seed at an aggressive valuation, miss your PMF targets by Seed, and watch what a repriced round does to your ownership by the time Series A shows up.
Reading the mechanics is one thing; watching a full-ratchet clause eat through founder ownership over a handful of turns is a much faster way to understand why experienced investors negotiate so hard over which anti-dilution version ends up in the term sheet.
Conclusion
A down round means your next investors are paying less per share than your last ones did — and the real cost to founders isn't the headline valuation drop, it's the anti-dilution mechanics that decide how that drop gets distributed across the cap table. Weighted average is the market standard and keeps the hit roughly proportional; full ratchet doesn't. Before you sign a term sheet with either clause, model what it does to your ownership — the free dilution calculator on this site shows the math in seconds.
Frequently asked questions
What is a down round?
A down round is a funding round priced at a lower valuation than the company's previous round, meaning new investors pay less per share than earlier investors did. It immediately dilutes existing shareholders and often triggers anti-dilution adjustments written into earlier preferred shares.
What triggers a down round?
Down rounds are usually triggered by a market-wide valuation reset, a company having raised its previous round ahead of its actual metrics, missed milestones like stalled PMF or high churn, or a runway shortage that forces a raise on a tight timeline regardless of price.
What's the difference between full ratchet and weighted average anti-dilution?
Full ratchet reprices all of an earlier investor's preferred shares down to the new, lower round price regardless of how many shares the new round issues. Weighted average adjusts the price proportionally, based on both the size of the price drop and the number of new shares — it's the market standard because it's far less punishing to founders.
How much does a down round dilute founders?
It depends on the anti-dilution clause in earlier rounds and the size of the price drop, but the founder dilution from the adjustment itself is often larger than the headline valuation drop, since it stacks on top of the dilution from the new investors' shares.
Is a bridge round better than a down round?
A bridge round (typically a SAFE or convertible note) delays the valuation question instead of answering it. It can avoid a down round if metrics improve before conversion, but if they don't, the note can convert at an even lower effective price than a straight down round would have set.
Test this decision in the game.
Apply the same assumption across one run; which metric burned three turns later?