Navigating startup funding market trends with Becki DeGraw | Wilson Sonsini Startup Legal Basics
This Week in Startups
Understanding Down Rounds and Anti-Dilution
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.
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