Understanding Down Rounds and Anti-Dilution

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A down round occurs when a company sells shares at a price lower than previous rounds, leading to a decrease in the value of outstanding preferred stock. This situation triggers anti-dilution provisions, which protect investors by adjusting the conversion rate of preferred stock to common stock. It’s important to note that while investors do not receive additional shares of preferred stock, the conversion ratio can change, allowing existing shares to convert into more common shares upon exit or IPO. The specifics of this adjustment are defined by a formula within the financing agreements, ensuring that investors maintain their value in the face of decreased share prices.

Todays show: Wilson Sonsini Partner Becki DeGraw joins Jason on the latest edition of Startup Legal Basics! In this episode, they break down the current state of startup funding (0:37), anti-dilution provisions (7:11), re-incentivizing management teams (16:23), and much more!

Timestamps:

(00:00) Wilson Sonsini Partner Becki DeGraw joins Jason

(0:37) Market update: Current state of startups and funding

(1:21) Consolidated investment trends and the venture capital slowdown

(4:23) The importance of due diligence, runway, and down round impacts

(7:11) Anti-dilution provisions and strategies for investor communication

(16:23) Re-incentivizing management teams and insider-led funding scenarios

(23:46) Importance of investor relations and board management

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