What Is a Down Round? Anti-Dilution Math With an Example
When a startup raises money at a lower price, earlier investors' anti-dilution terms shift ownership. A worked example shows who gives up how much.
A down round is a financing in which a startup sells new shares at a lower price per share than in its previous round. Earlier preferred investors usually have anti-dilution protection in the company’s charter, which lowers the price at which their preferred converts into common stock, so they get more common shares. Founders and employees absorb most of that shift. The exact formula is in the certificate of incorporation.
Most US venture charters start from the National Venture Capital Association’s model legal documents, whose model certificate of incorporation (last updated October 2025) contains the anti-dilution provisions most charters adapt. A down round is different from a lower valuation alone: what matters is the price per share.
Why do companies raise down rounds?
Usually because they need cash and the market will not support the last price. Valuations set at a peak, missed revenue targets or a sector falling out of favor can all leave a company choosing between a down round, a structured round with heavier investor terms, a bridge loan or a sale. Our guide to pre-money vs post-money valuation shows how the price per share is set in the first place.
How does full ratchet anti-dilution work?
Full ratchet resets the earlier investors’ conversion price to the new, lower price, no matter how few shares are sold. It is the strongest protection for investors and the most dilutive for common holders, which is why it is uncommon in standard terms.
How does broad-based weighted average anti-dilution work?
Weighted average adjusts the conversion price partway, depending on how much money is raised at the lower price relative to the company’s size. The formula used in NVCA-style charters is:
CP2 = CP1 × (A + B) ÷ (A + C)
- CP2 is the new conversion price and CP1 the old one.
- A is the number of shares outstanding before the new issue, counted on an as-converted basis.
- B is the number of shares the new money would have bought at CP1.
- C is the number of new shares actually issued.
“Broad-based” means A includes outstanding options and other convertible securities. A “narrow-based” version counts fewer shares in A, which produces a bigger adjustment for investors.
What does a down round look like with real numbers?
Take a startup with 10,000,000 shares on an as-converted basis: 6,500,000 common shares held by founders and staff, a 1,500,000-share option pool, and 2,000,000 Series A preferred shares bought at $2.00 each for $4,000,000. Series A converts one-for-one at a conversion price of $2.00.
The company now sells 2,000,000 Series B shares at $1.00, raising $2,000,000.
- Full ratchet: CP2 = $1.00. Series A’s $4,000,000 now converts into 4,000,000 common shares.
- Broad-based weighted average: A = 10,000,000; B = $2,000,000 ÷ $2.00 = 1,000,000; C = 2,000,000. CP2 = $2.00 × 11,000,000 ÷ 12,000,000 = about $1.833. Series A converts into about 2,181,818 shares.
- Narrow-based weighted average (A counting 8,500,000 shares, without the option pool): CP2 = $2.00 × 9,500,000 ÷ 10,500,000 = about $1.810, or about 2,210,526 shares.
| As-converted ownership after Series B | No adjustment | Broad-based weighted average | Full ratchet |
|---|---|---|---|
| Common and option pool (8,000,000 shares) | 66.7% | 65.7% | 57.1% |
| Series A | 16.7% | 17.9% | 28.6% |
| Series B | 16.7% | 16.4% | 14.3% |
| Total shares, as converted | 12,000,000 | 12,181,818 | 14,000,000 |
Under weighted average, common holders give up about one percentage point beyond the new money’s dilution. Under full ratchet, they give up almost ten. In a real round, the new investor would also insist on a price that delivers its target percentage after the adjustment, so the effect on common can be larger than this table shows.
What is pay-to-play?
Pay-to-play is an optional charter provision that penalizes existing investors who do not buy their share of the new round. A non-participating investor’s preferred stock may convert to common, or lose its anti-dilution rights and other preferences. It pushes insiders to support the company in a down round and shifts the anti-dilution benefit to those who put in new money.
Not every new share triggers an adjustment. Charters list “exempted securities,” typically including option grants under the approved plan and shares issued on conversion of preferred, and preferred holders can usually waive an adjustment by the vote set in the charter. Liquidation preferences also matter: a down round can leave more preference stacked ahead of common, explained in our guide to liquidation preferences.
What happens to employee stock options in a down round?
Options are common stock equivalents, so anti-dilution does not protect them. A down round often brings a lower 409A valuation of the common stock, which can leave existing options “underwater,” with exercise prices above current fair market value.
Boards sometimes respond with an option repricing or exchange, lowering the exercise price to the new fair market value. For incentive stock options, a repricing is treated as a new grant for tax purposes, which restarts the ISO holding periods. New grants made after the round use the new, lower price. See our explainer on 409A valuations for how that price is set.
Bottom line
To see what a down round means for you, ask for the pro forma cap table showing every class on an as-converted basis before and after the round, including any anti-dilution adjustment. Then check the liquidation preference stack, which decides payouts in a sale below the preferred’s invested amount. A startup attorney or the company’s finance team can explain charter terms that differ from the NVCA model.
FAQ
Does anti-dilution give investors new shares right away?
No. It changes the conversion price, so preferred holders receive more common shares when they convert, usually at an IPO or sale. The preferred share count itself stays the same.
Is a flat round a down round?
No. A round at the same price per share does not trigger price-based anti-dilution, though it still dilutes everyone’s percentage through new shares.
Do founders get anti-dilution protection?
Not usually. Founders hold common stock, and anti-dilution provisions in standard charters protect only preferred stock.
Can a down round be avoided with a SAFE or convertible note?
Sometimes companies raise bridge money instead, but a later round at a lower price can still trigger adjustments. How SAFEs convert is covered in our guide to how startup funding rounds work.
