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is a round of equity funding that is priced lower than a previous round. A sale of one million shares of Series B Convertible Preferred Stock at $2.50 per share after an earlier sale of Series A Convertible Preferred Stock at $3.00 per share would be a down round. Since almost all fundings are made with the expectation that the company’s share value will increase after the investment is made, down rounds are usually major disappointments to investors and management. Down rounds disappoint the investors in earlier rounds because they show they misjudged the company’s prospects for progress when they made their earlier investment. Down rounds also disappoint because they dilute the ownership of all existing shareholders by requiring the company to sell more shares than a similar round at higher prices in order to raise needed capital. This dilution is often exacerbated for the company management and other holders of the company’s common stock by virtue of the antidilution provisions most venture capital investors require as a consideration for their investing in earlier rounds of the company’s financing. These antidilution protections, which typically are not provided to management or other holders of the company’s common, provide protected venture capital investors with additional free stock after a down round that reduces the dilution their stock position suffers as a result of a down round. See: Antidilution Provisions, Dilution (Percentage), Dilution (Value), Equity Penalties, Follow-on Fundings, Ratchets, Weighted Average Antidilution.
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