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.

RELATED TERMS
  1. Down Round

    A down round is a round of financing where investors purchase ...
  2. Series A Financing

    Series A financing is the first round of financing undergone ...
  3. A Round Financing

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

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

    Financing arranged by a company while under the chapter 11 bankruptcy ...
  6. Bankruptcy Court

    Bankruptcy court is a specific kind of federal court that deals ...
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

    When To Declare Bankruptcy

    When is bankruptcy the best or only route– and when is it better to look at alternative solutions? And should you always hire a lawyer?
  4. Financial Advisor

    Corporate bankruptcy: An overview

    When public company files for corporate bankruptcy, the bondholders are first in line to receive their share back. Equity holders on the other hand, are second in line to bondholders when a corporate ...
  5. Personal Finance

    Should You File for Bankruptcy?

    Find out how to determine whether bankruptcy will help or hurt your financial situation.
  6. Personal Finance

    What You Need To Know About Bankruptcy

    Don't choose this last-resort option until you learn how it will affect your future.
  7. 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.
  8. Taxes

    5 Myths About Personal Bankruptcy

    There are some persistent myths that hover over the process of bankruptcy that are either half-truths or completely false.
  9. 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.
  10. Small Business

    The basics of financing a business

    From debt financing to equity financing, there are numerous ways to fund a business startup. Find out which one is the best funding model for your company?
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center