/down-round-prep

Help founders navigate the emotionally and legally complex process of raising at a lower valuation.

Tone: Pragmatic and supportive. Down rounds are hard but not the end.

Important: This is guidance, not legal or financial advice. Work with your lawyers and advisors.

Process:

1. Acknowledge the situation:

   • "Down rounds are tough emotionally and logistically. Let's make sure you navigate this well."
   • "The goal is to get the company funded with a structure that still motivates everyone."

2. Load context:

   • Check .claude/metrics.local.md for last valuation, current metrics
   • "What was your last round valuation? What are investors valuing you at now?"

Part 1: Understanding the Situation

3. Assess the gap:

   Last Round	Current Offer	Gap
   $[X]M pre	$[Y]M pre	[Z]% down

   Severity scale:

   • 0-20% down: Flat to modest down, manageable
   • 20-50% down: Significant, needs careful structuring
   • 50%+ down: Severe, major restructuring needed

4. Understand who's affected:

   Stakeholders in a down round:

   Who	Impact	Concern
   Founders	Dilution, potentially underwater options	Motivation, control
   Employees	Options may be underwater, dilution	Retention, morale
   Previous investors	Their shares worth less	Protecting ownership, anti-dilution
   New investors	Getting better price	Ensuring motivated team

5. Key terms to understand:

   Anti-dilution provisions:

   • Full ratchet: Previous investors get repriced to new price (severe dilution to founders/employees)
   • Weighted average: Previous investors get partial protection (most common)
   • Broad-based weighted average: Most founder-friendly version

   "Do your existing investors have anti-dilution rights? What type?"

   Pay-to-play:

   • Requires existing investors to invest in the new round to keep their preferences
   • Can help clean up cap table and reset dynamics

Part 2: Negotiation Strategy

6. Identify your leverage:

   Even in a down round, you may have leverage:

   • Alternative paths (bridge from existing investors, acqui-hire, other terms sheets)
   • Key relationships or contracts
   • Technology or IP value
   • Team quality

   "What alternatives do you have? Even weak alternatives create leverage."

7. Key negotiation points:

   Issue	Why It Matters	What to Push For
   Valuation	Total dilution	Best price you can get, but don't die on this hill
   Anti-dilution trigger	How much existing investors get adjusted	Broad-based weighted average, not full ratchet
   Option pool refresh	Employee motivation	New pool AFTER down round pricing
   Founder vesting	Your ownership	Waive anti-dilution on founder shares if possible
   Pay-to-play	Cap table cleanup	Include if helpful, resist if existing investors are allies
   Liquidation preferences	Payout in exit	Non-participating preferred, 1x (not 2x+)
   Board composition	Control	Maintain balance if possible

8. The refresh conversation:

   Down rounds often need equity refresh to keep team motivated:

   • New option grants to make team whole (or closer)
   • Top-up grants for key people
   • Retention packages for flight risks

   "Your team's options may be underwater. How will you keep them motivated?"

Part 3: Communication

9. Communicating with existing investors:

   What they need to hear:

   • Honest assessment of what went wrong
   • Clear plan for how new capital will be used
   • Why this investor/terms are the right choice
   • What you need from them (waivers, support, bridge)

   Script:

   "I want to talk about our fundraise. We're seeing valuations at [X], which is below our last round. Here's why this is happening... Here's our plan going forward... What we need from you is [specific ask]."

10. Communicating with the team:

    Timing: After the round is closed (don't announce until certain)

    What they need to hear:

    • Honest assessment without dooming
    • What this means for their equity
    • What you're doing to make it right (refresh)
    • Confidence in the path forward

    Script:

    "I want to share some news about our funding. We raised [amount] at a valuation lower than our last round. Here's why this happened... Here's what it means for you and your equity... Here's what we're doing to make sure you're still well-positioned... Here's why I'm confident about our future..."

    Don't:

    • Pretend it's not a down round
    • Over-apologize or seem defeated
    • Promise things you can't deliver

11. Communicating with candidates/new hires:

    Be honest but framed:

    • "We raised at a lower valuation than our previous round"
    • "Here's why I think this is actually a good entry point"
    • "Here's the equity package and why I think it's valuable"

Part 4: Execution

12. Pre-closing checklist:

    Legal:

    • Review anti-dilution provisions in existing documents
    • Model cap table with various scenarios
    • Review consent requirements (who needs to approve)
    • Prepare waiver requests if needed
    • Review employment agreements for equity provisions

    Financial:

    • Model dilution for all stakeholders
    • Plan option pool refresh
    • Understand liquidation waterfall
    • Plan use of funds

    Communication:

    • Board approval process
    • Existing investor communication
    • Team communication (post-close)
    • Public communication (if necessary)

13. Post-closing:

    • Execute equity refresh grants
    • Have 1:1s with key team members
    • Update team on the path forward
    • Focus on hitting milestones for next raise

14. Create the down round plan:

    # Down Round Preparation
    Date: [YYYY-MM-DD]
    Status: [Negotiating/Term Sheet/Closed]
    
    ## Situation
    - Last round: $[X]M pre at [date]
    - Current offer: $[Y]M pre
    - Down: [Z]%
    - Existing anti-dilution type: [Full ratchet/Weighted average]
    
    ## Key Stakeholders
    | Stakeholder | Current Ownership | Post-Round | Notes |
    |-------------|-------------------|------------|-------|
    | Founders | | | |
    | Employees (pool) | | | |
    | Series [X] | | | |
    | New investor | | | |
    
    ## Negotiation Priorities
    1. [Most important term]
    2. [Second priority]
    3. [Third priority]
    
    ## Waivers Needed
    - [ ] [Investor] - [What waiver]
    - [ ] [Investor] - [What waiver]
    
    ## Equity Refresh Plan
    - Total new pool: [X]%
    - Key recipients:
      - [Role/Person]: [Amount]
    
    ## Communication Plan
    - Board: [Date, approach]
    - Existing investors: [Date, approach]
    - Team: [Date, approach]
    
    ## Post-Close Actions
    - [ ] Execute refresh grants
    - [ ] Team communication
    - [ ] 1:1s with key people
    - [ ] Set new milestones
    

15. Close with perspective:

    • "Many successful companies had down rounds. It's a funding event, not a judgment."
    • "The best founders use this as a reset and come back stronger."
    • "Focus on what you can control: execution."

Remember:

• A down round is better than no round
• Protect what matters: motivated team, clean cap table, enough runway
• The goal is to get back to a position of strength
• Your reputation for handling hard things well matters