What a Down Round Is and How It Affects the Existing Cap Table

A down round is a funding round in which new shares are issued at a price per share lower than the price paid by investors in the most recent prior round. If a company raised its Seed round at £6 per share and raises a subsequent round at £4 per share, the subsequent round is a down round. The lower price per share dilutes every existing shareholder, but the economic effect is not distributed equally. Anti-dilution provisions held by earlier preferred shareholders trigger adjustments that concentrate the dilution on founders and common holders.

The Distinction That Matters

A down round does not just reduce the company's implied valuation. It activates contractual mechanisms in the existing shareholder agreements that change the share count of protected investors. Under broad-based weighted average anti-dilution — the most common form — a formula adjusts the conversion price of earlier preferred shares downward, which means those shares convert into more common shares at exit. The additional shares come from the common pool, which is primarily composed of founder shares and ungranted option pool reserve.

A company that raises a down round without modeling the anti-dilution adjustments for all protected share classes will produce an incorrect post-close cap table. The correct post-close cap table requires the anti-dilution formula to be applied to every protected class before the new investor's allocation is calculated.

Why It Surfaces in a Raise Process

In a down round, the company's legal team identifies every anti-dilution provision in the existing shareholder agreements and calculates the adjustment required for each protected class. This calculation must be completed before the round closes and reflected in the updated cap table. A company that has not maintained its cap table with the anti-dilution terms documented for each share class cannot produce this calculation without first reconstructing the cap table governance.

The Common Structural Error

The most common error is not identifying which share classes carry anti-dilution protection when the cap table is originally built. A cap table that records preferred share classes without noting the anti-dilution terms applicable to each cannot be used to calculate the effect of a future down round. This omission is discovered at the worst possible moment — during a down round's legal process, when the company has limited negotiating leverage.

RELATED TERMS
- What Anti-Dilution Protection Does to a Startup Cap Table in a Down Round
- What a Liquidation Preference Clause Does to Founder Proceeds in an Exit
- What a Fully Diluted Cap Table Records
- Cap Table Errors That Surface During Legal Due Diligence and the Infrastructure Required to Resolve Them

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