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.

  1. A Round Financing

    When startups pursue the next level of funding after seed capital, ...
  2. Voluntary Bankruptcy

    Voluntary bankruptcy is a type of bankruptcy where an insolvent ...
  3. Bankruptcy Financing

    Bankruptcy financing is financing arranged by a company while ...
  4. Prepackaged Bankruptcy

    A prepackaged bankruptcy is a plan for financial reorganization ...
  5. Bankruptcy Court

    Bankruptcy court is a specific kind of federal court that deals ...
  6. Alphabet Rounds

    Alphabet rounds are the first rounds of financing for a startup ...
Related Articles
  1. Taxes

    Bankruptcy Filing Changes That Could Affect You

    When the economy is down, more people file for bankruptcy. Make sure you know about the changes that have been made to this process.
  2. Small Business

    How Investors Can Profit From Bankrupt Companies

    Learn how a bankrupt company can provide great opportunities for savvy investors to find the best undervalued investment opportunities to profit from.
  3. Taxes

    Changing The Face Of Bankruptcy

    A 2005 law attempts to unmask fraudulent debtors and still save those who are struggling. Will it affect you?
  4. Small Business

    Does Your Startup Need Venture Capital Money?

    Venture capital funding provides capital to grow a business. However, entrepreneurs will also lose some control over business decisions.
  5. Personal Finance

    Life After Bankruptcy

    Find out what you have to look forward to after filing for Chapter 7 or 13.
  6. Taxes

    How To Survive Bankruptcy

    Bankruptcy is not the end of the world. You can survive it and come out on the other side more financially solid.
  7. Taxes

    How to Hire a Bankruptcy Lawyer

    How do you find the right bankruptcy lawyer? What you should look for to determine the right attorney for you.
  8. Investing

    How Social Venture Capital Is Changing the World

    Learn what social venture capital is and the ways in which it differs from traditional venture capital. Identify two leading social venture capital firms.
  9. Small Business

    Who are Venture Capitalists?

    Venture capital investment firms can provide the seed money for high-risk, start-up companies. People called venture capitalists run these firms, and make the investment decisions.
  1. How does chapter 11 bankruptcy affect a company's stocks and bonds?

    Learn more about what happens to companies that file for chapter 11 bankruptcy protection - and how it differs from other ... Read Answer >>
  2. Can personal loans be included in bankruptcy?

    Read about debts that are dischargeable when filing for bankruptcy. Learn about how personal loans are treated when filing ... Read Answer >>
Trading Center