What is a Down Round?
This post discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP and the author expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinion.
By definition, a down round is an actual priced round where the price per share is less than the price per share was in the previous round. It differs from a convertible note round, where the valuation cap is less than the prior round. You must read the business’s certificate of incorporation (COI) to see how a down round is defined for your company.
In the business’s COI, you will find a definition of the original issue price or something similar, which states the price per share on the prior round. From here, you can figure out if the convertible note or the safe will trigger the down round in your documents. For the most part, a down round will not be readily ascertainable; however, in a priced equity round, you can quickly tell if there will be a down round based on the actual price you sell shares for. In other convertible scenarios, you must follow the exact math in the certificate of incorporation.
We have seen an increase in Series Seed COIs containing a general definition of an up or down round; however, determining whether the round is a down round may need to do more precise math. Because of this, you should look to see if your specific round structure will trigger it. If you need help determining the price per share in your next round, you can use our free cap table tool to model out the specifics of your round.
Before we move onto the mechanics of down rounds, complete step one in executing a down round: figure out whether it is, in fact, a down round. To do so, you must review anti-dilution provisions in the business’ certificate of incorporation and investment agreements. The following blog posts in this series will discuss the next steps.
This post discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP and the author expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinion.
By definition, a down round is an actual priced round where the price per share is less than the price per share was in the previous round. It differs from a convertible note round, where the valuation cap is less than the prior round. You must read the business’s certificate of incorporation (COI) to see how a down round is defined for your company.
In the business’s COI, you will find a definition of the original issue price or something similar, which states the price per share on the prior round. From here, you can figure out if the convertible note or the safe will trigger the down round in your documents. For the most part, a down round will not be readily ascertainable; however, in a priced equity round, you can quickly tell if there will be a down round based on the actual price you sell shares for. In other convertible scenarios, you must follow the exact math in the certificate of incorporation.
We have seen an increase in Series Seed COIs containing a general definition of an up or down round; however, determining whether the round is a down round may need to do more precise math. Because of this, you should look to see if your specific round structure will trigger it. If you need help determining the price per share in your next round, you can use our free cap table tool to model out the specifics of your round.
Before we move onto the mechanics of down rounds, complete step one in executing a down round: figure out whether it is, in fact, a down round. To do so, you must review anti-dilution provisions in the business’ certificate of incorporation and investment agreements. The following blog posts in this series will discuss the next steps.
