DFN Ventures reposted this
How painful is a down round for founders? EXTREMELY painful, especially considering the nature of anti-dilution provisions you have agreed to in previous rounds. Unfortunately I’ve been hearing about down rounds from investors and founders continuously for the past year. For my portfolio, we have only experienced 1 priced down round and like most down rounds, the founder took a bigger brunt of the dilution than the investors due to the anti-dilution provisions of the rounds we invested into. What is anti-dilution provision? Simply put, if the price of the next round is lower than the current round, the investors get the lower price or some form of a lower price. Let me provide a simple example: Series A was priced at $2/share Series B is priced at $1/share In a fully ratcheted anti-dilution provision, the investors in the Series A round now get $1/share or essentially that round had double the amount of dilution than originally planned and the dilution typically hits the common shareholders which is what the founders hold. What can you do about this? - Review what kind of anti-dilution provisions you have now and make sure you are aware of them in future rounds - If you have raised at a price much higher than current valuations, try to avoid raising until you recapture that value - Be very careful ramping up valuation in any round or it can do the opposite of what you’re trying to achieve which is limiting dilution #cpg #venturecapital #startups #downround