Down rounds and up rounds of financing refer to the pre-money, or pre-investment, valuation of a company prior to a round of financing. Up rounds, where the company's value has increased from the valuation it was given prior to the previous round of financing, are of course preferable; the increased valuation means that the company is progressing and more likely to be a profitable venture for investors. Sometimes, companies must weather the adversity of suffering through a down round of financing.

What Is a Down Round of Financing?

A down round is basically defined as a round of venture capital financing. Before a down round of financing, investors place a lower valuation on the company than the pre-money valuation that was placed on the company prior to the previous round of financing. For example, if the pre-money valuation of a company in a Series A round of financing is $10 million, but the pre-money valuation of the company before the Series B round is only $8 million, then the Series B round is a down round.

A down round of financing results in investors paying a lower per share price than what previous investors paid. It also usually means that the down round investors will seek to be granted some rights or particular preferences that are superior to, or take precedence over, the rights obtained by investors in previous financing rounds.

Down rounds result in dilution of shares for existing shareholders and can significantly reduce the equity position of the company's founders relative to investors in the down round.

Rounding Up Investment Capital

While investors can obtain certain advantages from a down round of financing, such as greater liquidation preference, anti-dilution protection in the event of future down rounds, and an increased equity position and greater control of the company, they generally prefer to see a steady succession of up rounds of financing, since this is a good indication that their capital investments will pay off well. Ideally, each round of financing leads to a significant increase in the company's value beyond just the additional capital injected by investors.

Following a seed round designed to provide necessary startup capital for a business, further rounds of financing may commonly unfold as follows:

Series A financing sees the entry of venture capital firms, either alone or in partnership with other venture capital firms. Valuation has hopefully increased as a result of progress made with the initial financing. Goals of Series A financing include continuing development of the company and its products, hiring key personnel, and attracting investors for the next financing round.

• Series B financing is typically larger than Series A financing. Ideally, the company already has at least some revenue streams producing income, making it easier for investors to create realistic projections of future revenues and profitability. Series B financing enables additional product and operational development, seeing the business become more firmly established and continuing to create additional value for future investors.

• Series C and possible later financing rounds are considered late-stage financing, aimed at providing operational stability and continued growth and expansion. Series C funding may be used to develop more products, finance an acquisition or prepare for an initial public offering (IPO).

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