What is Crammed Down

"Crammed down" refers to the result of a dilutive venture capital financing round or the imposition of a bankruptcy reorganization plan by the court. In the context of venture capital financing, when a financing round is crammed down it means that the price of each share of a business is below earlier prices, causing the percentage of the company owned by the earlier investors to be lowered (or crammed down). Such deals are also called "burn outs" or "wash outs." In the context of bankruptcies, when a bankruptcy court initiates a reorganization plan for an individual or company despite objections from creditors, that order or plan has been "crammed down," as in 'down the throats of the creditors.'

Breaking Down Crammed Down

In venture financing, if the earlier (common) investors of the company do not pony up new cash for the next round of financing round, then their interest in the company is "crammed down." The reasoning is that initial investors should suffer a penalty if they do not contribute to subsequent financing rounds rather than benefit fully from subsequent financing rounds. Such a cramming down also targets founders and other owner-managers for not running the startup well enough to avoid such an action. Such a situation is also known as a "down round."

In bankruptcies, crammed down plans are generally disliked by creditors because they would rather liquidate any assets to get back some of the money owed to them. Crammed down is also used to denote any transaction in which existing investors are forced to accept unfavorable financing, buyout or pricing terms.

Crammed Down and Venture Capital Financing

A crammed down financing in venture capital usually happens when companies are financed in multiple rounds and before they enact an exit round. When startups are new and immature, their valuations tend to be very low and the entrepreneur or business owner is unable to convince investors to fully fund their idea or business through a liquidity event. It may also be too early to know how much funding is needed. Venture capitalists also like to withhold funding to further motivate founders and to ensure that operations are lean by rationing operating capital.   

Crammed Down and Bankruptcies

In a crammed down personal bankruptcy, a debtor will ask the court to change the terms of their contract with a creditor to reduce their debt to be in line with the fair market value of the collateral securing that debt. In a crammed down business bankruptcy, the creditors will still maintain collateral on the company as long as it offers repayment of the "secured portion" or fair market value of the collateral in their repayment plan.