Down-Round Protection
Also called: Down Round Clause · Price Protection Clause
Down-round protection is a broader term for anti-dilution mechanisms — weighted-average or full ratchet — that adjust an investor's position if the company later raises capital at a lower valuation than the investor originally paid. It's the general category; the specific formula used determines how strong the protection actually is.
In more detail
A "down round" — a financing round priced lower than the company's previous valuation — is a signal the company's perceived value has fallen, and without protection, earlier investors simply absorb that value loss proportionally like everyone else.
The strength of down-round protection an investor negotiates typically correlates with their negotiating leverage at the time of investment — earlier, smaller investors often get weaker or no protection, while larger, later-stage investors more commonly secure it.
Down-round protection can create a difficult dynamic for a company trying to raise capital during a downturn — investors' anti-dilution rights make a down round more costly to existing shareholders, sometimes deterring companies from raising needed capital until the situation becomes even more difficult.
A company's Series A investors have down-round protection. When the company later raises a Series B at a lower valuation, the protection mechanism (whether ratchet or weighted-average) adjusts the Series A investors' effective price, shifting additional dilution onto the founders and other unprotected shareholders.
What our lawyers check
- Which investors have down-round protection, and under what mechanism
- Whether the mechanism is full ratchet or weighted-average
- How the protection is modelled to affect founder dilution in a realistic down-round scenario
- Any carve-outs from triggering the protection (e.g., option pool issuances)
Contracts where this clause matters
Related terms
This definition is general information about commercial contracting practice, not legal advice. How a clause operates depends on the specific wording of your agreement and the law that governs it. For advice on your contract, have it reviewed by a lawyer.
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