Down Round Preparation Playbook

DOWN ROUND PHILOSOPHY

Understanding Down Rounds

DOWN ROUND PHILOSOPHY

WHAT IS A DOWN ROUND:
A financing round at a lower valuation than the previous round

WHY DOWN ROUNDS HAPPEN:
☐ Market correction (macro)
☐ Performance below expectations
☐ Extended time between rounds
☐ Sector rotation
☐ Company-specific challenges
☐ Over-valuation in prior round

DOWN ROUND REALITIES:

1. THEY'RE MORE COMMON THAN DISCUSSED
   ☐ ~20% of rounds in normal markets
   ☐ Higher % in corrections
   ☐ Not a death sentence
   ☐ Many successful companies had down rounds

2. THE ALTERNATIVE IS OFTEN WORSE
   ☐ No round = shut down
   ☐ Bridge = delay, same issues
   ☐ Down round = capital + fresh start

3. EXECUTION MATTERS MORE
   ☐ Terms negotiation crucial
   ☐ Stakeholder management critical
   ☐ Recovery plan essential
   ☐ Team retention is everything

4. THIS TOO SHALL PASS
   ☐ Valuation is one moment in time
   ☐ Execution drives future value
   ☐ Market conditions change
   ☐ Focus on building

MINDSET FOR DOWN ROUNDS:
☐ Accept reality quickly
☐ Focus on what you can control
☐ Protect your people
☐ Negotiate the best terms possible
☐ Plan for recovery

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SITUATION ASSESSMENT

Comprehensive Down Round Analysis

DOWN ROUND ASSESSMENT

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VALUATION ANALYSIS
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PRIOR ROUND:
Date: _____
Pre-money: $_____M
Post-money: $_____M
Price per share: $_____
Lead investor: _____

CURRENT SITUATION:
Time since last round: ___ months
Current ARR/Revenue: $_____
Growth rate: ___%
Original projections at this point: $_____
Actual vs. projected: -___%

MARKET CONDITIONS:
Public market comparables: Down ___%
Private valuations in sector: Down ___%
Recent comparable deals: _____x revenue (vs _____x prior)

FAIR VALUE ESTIMATE:
Method 1 (Current ARR × Market Multiple):
$_____ × _____x = $_____M

Method 2 (Comparable Transactions):
Average comparable: $_____M

Method 3 (Investor Feedback):
Range discussed: $_____M - $_____M

ESTIMATED DOWN ROUND VALUATION:
Range: $_____M - $_____M (down ___% - ___%)
Most likely: $_____M (down ___%)

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ROOT CAUSE ANALYSIS
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CONTRIBUTING FACTORS:

Market/Macro:
☐ Overall market correction: ___% impact
☐ Sector-specific headwinds: ___% impact
☐ Interest rate environment: ___% impact
☐ Public market comparables down: ___% impact

Performance:
☐ Revenue below plan: ___% miss → ___% valuation impact
☐ Growth deceleration: ___% impact
☐ Unit economics not improving: ___% impact
☐ Churn higher than expected: ___% impact

Company-Specific:
☐ Product delays: ___% impact
☐ Key departures: ___% impact
☐ Customer losses: ___% impact
☐ Competitive pressure: ___% impact

Prior Valuation:
☐ Prior round overvalued: ☐ Likely ☐ Possible ☐ No

PRIMARY DRIVER: _____________________

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ALTERNATIVES ANALYSIS
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OPTION 1: DOWN ROUND
Pros:
☐ Capital to execute
☐ New investor validation
☐ Clean slate
Cons:
☐ Dilution
☐ Anti-dilution triggers
☐ Employee equity impact
☐ Morale/perception

OPTION 2: BRIDGE FROM EXISTING
Pros:
☐ No new valuation discussion
☐ Existing relationships
☐ Faster to close
Cons:
☐ Delays valuation reckoning
☐ May not have capacity
☐ Kicks can down road
☐ Still have note overhang

OPTION 3: FLAT ROUND
Pros:
☐ Avoids down round label
☐ Less anti-dilution impact
Cons:
☐ May not be achievable
☐ Still negative signal
☐ Difficult negotiation

OPTION 4: REDUCE BURN / EXTEND
Pros:
☐ No dilution
☐ Buy time
Cons:
☐ Cuts growth
☐ May still need capital
☐ Talent risk

OPTION 5: STRATEGIC ALTERNATIVES
Pros:
☐ May provide exit
☐ Team landing spots
Cons:
☐ May undervalue company
☐ Loss of independence
☐ Process is slow

RECOMMENDATION: _____________________
RATIONALE: _____________________

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TERM NEGOTIATION

Down Round Term Strategy

DOWN ROUND TERM NEGOTIATION

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KEY TERMS TO FOCUS ON
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VALUATION (Most Important):
Target valuation: $_____M
Floor valuation: $_____M
Justification: _____________________

LIQUIDATION PREFERENCE:
Prior rounds total preferences: $_____M
New round requested: _____x
Target: 1x non-participating (standard)
Impact of >1x: _____________________

PAY-TO-PLAY:
Existing investor pressure to participate
☐ Accept if reasonable (protects cap table)
☐ Resist if punitive

ANTI-DILUTION PROVISIONS:
Existing investors have: ☐ Broad-based ☐ Narrow ☐ Full ratchet
Impact of down round:
Existing investor shares increase by: _____
Founder dilution from anti-dilution: -____%

Can we negotiate:
☐ Waiver of anti-dilution (ask)
☐ Partial waiver
☐ Cap on adjustment

BOARD COMPOSITION:
Current: _____ seats (___ founder, ___ investor, ___ independent)
New investor request: _____
Target: Maintain founder influence

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FOUNDER PROTECTION
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WHAT TO FIGHT FOR:
☐ Reasonable valuation (not fire sale)
☐ 1x liquidation (not participating)
☐ Anti-dilution waiver/modification
☐ Maintain board seat(s)
☐ Refresh option pool for employees

WHAT TO ACCEPT:
☐ Lower valuation (if market-justified)
☐ Standard investor terms
☐ Reasonable protective provisions
☐ Information rights expansion

RED LINES:
☐ Won't accept full ratchet anti-dilution trigger
☐ Won't accept >1.5x liquidation preference
☐ Won't accept founder vesting restart
☐ Won't accept investor board majority

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EXISTING INVESTOR MANAGEMENT
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ANTI-DILUTION CONVERSATION:

Talking points:
1. "The down round is in everyone's interest vs. alternatives"
2. "Full anti-dilution exercise creates misalignment"
3. "Suggest partial waiver to keep founders motivated"
4. "We're all in this together for the long term"

Waiver request:
☐ Full waiver
☐ Partial waiver (___% of adjustment)
☐ Adjustment capped at ___

Pro-rata participation:
☐ Request existing investors participate pro-rata
☐ Creates alignment
☐ Shows support to new investor
☐ Maintains ownership balance

INVESTOR-BY-INVESTOR STRATEGY:
| Investor | Anti-dilution | Participation | Approach |
|----------|---------------|---------------|----------|
| | | | |
| | | | |
| | | | |

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STAKEHOLDER COMMUNICATION

Comprehensive Communication Plan

DOWN ROUND COMMUNICATION PLAN

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BOARD COMMUNICATION
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TIMELINE:
Week 1-2: Early warning conversation
Week 3-4: Present options and recommendation
Week 5+: Approval and execution

BOARD MEMO OUTLINE:
1. Situation summary
2. How we got here (honest assessment)
3. Options considered
4. Recommended path
5. Key terms
6. Stakeholder impact
7. Recovery plan
8. Ask for approval

KEY MESSAGES:
☐ We've exhausted alternatives
☐ This is the best path forward
☐ We have a plan for recovery
☐ We need your support

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EXISTING INVESTOR COMMUNICATION
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1:1 CONVERSATIONS (Before announcement):
☐ Explain situation
☐ Share path forward
☐ Request participation
☐ Discuss anti-dilution
☐ Seek support

TOPICS TO COVER:
☐ What happened (honest)
☐ Why down round is best option
☐ What terms we're targeting
☐ Their role in the round
☐ Ask for anti-dilution consideration
☐ Recovery plan

SAMPLE SCRIPT:
"I wanted to talk before you hear this elsewhere.
We're looking at raising a down round. Here's why...

The alternatives were [X, Y, Z], but this gives us
the best path to [outcome].

We're targeting $___M at $___M. I'd love your
participation and support. Can we also discuss
the anti-dilution provisions to ensure founder
motivation remains aligned?"

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EMPLOYEE COMMUNICATION
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TIMING:
☐ After term sheet signed (not before)
☐ All-hands meeting
☐ Manager briefing first

MESSAGE FRAMEWORK:
1. The News
   "We're raising at a lower valuation"

2. The Context
   "Here's why (market, performance, etc.)"

3. The Impact
   "Here's what it means for you"

4. The Plan
   "Here's what we're doing about it"

5. The Ask
   "Here's what I need from you"

EQUITY IMPACT:
Be transparent about:
☐ Options may be underwater
☐ Refresh grants being considered
☐ Long-term value still possible
☐ Alternative was worse

TALKING POINTS FOR MANAGERS:
☐ Be honest about valuation
☐ Focus on the future
☐ Acknowledge concerns
☐ Highlight retention measures
☐ Reiterate belief in mission

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EMPLOYEE RETENTION PROGRAM
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IMMEDIATE ACTIONS:
☐ Identify critical employees
☐ Prepare retention offers
☐ Plan equity refresh

RETENTION TOOLS:
☐ Cash retention bonuses
☐ Option repricing/exchange
☐ New option grants at new price
☐ Title/responsibility upgrades
☐ Genuine appreciation

EQUITY REFRESH:
New option pool: ___% (refreshed at new low price)
Allocation priority:
1. _____
2. _____
3. _____

COMMUNICATION:
"Your existing equity was granted at [$X]. While the
current valuation is lower, we're granting you new
options at [$Y] which give you meaningful upside.
Here's the path to those being valuable..."

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RECOVERY PLANNING

Post-Down Round Recovery

POST-DOWN ROUND RECOVERY PLAN

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30-DAY PRIORITIES (Stabilization)
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TEAM:
☐ Retention program executed
☐ All-hands completed
☐ Manager toolkits distributed
☐ Critical employee conversations done
☐ Departures managed (if any)

OPERATIONS:
☐ Cash in bank
☐ Runway confirmed
☐ Budget reset complete
☐ Team aligned on priorities

CULTURE:
☐ Acknowledge the situation
☐ Reset expectations
☐ Celebrate small wins
☐ Maintain energy

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90-DAY PRIORITIES (Execution)
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METRIC FOCUS:
Primary metric to improve: _____
Current: _____
90-day target: _____
How: _____

Secondary metric: _____
Current: _____
90-day target: _____
How: _____

PRODUCT/BUSINESS:
☐ Priority 1: _____
☐ Priority 2: _____
☐ Priority 3: _____

TEAM:
☐ Key hires to make: _____
☐ Team gaps to fill: _____
☐ Skills to develop: _____

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12-MONTH RECOVERY MILESTONES
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MILESTONE 1 (Month 3):
Metric: _____
Target: _____
Why it matters: _____

MILESTONE 2 (Month 6):
Metric: _____
Target: _____
Why it matters: _____

MILESTONE 3 (Month 9):
Metric: _____
Target: _____
Why it matters: _____

MILESTONE 4 (Month 12):
Metric: _____
Target: _____
Why it matters: _____

PATH TO NEXT ROUND:
Target timing: _____
Target metrics: _____
Target valuation: $_____M
Required growth rate: ____%

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SUCCESS CRITERIA
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NEXT ROUND READINESS:
| Metric | Now | Required | Gap |
|--------|-----|----------|-----|
| ARR | $___K | $___K | ___% |
| Growth | ___% | ___% | ___pp |
| NRR | ___% | ___% | ___pp |
| Burn multiple | ___ | ___ | |
| Runway | ___mo | 12mo+ | |

IF WE HIT THESE:
Next round valuation: $_____M (___% above down round)
Founder ownership recovery: From ___% to ___% (with next round)
Total raised to date: $_____M

NARRATIVE FOR NEXT ROUND:
"We faced [challenge], took the tough decision to
raise a down round, and have since [accomplishments].
We've proven [what] and are now positioned for [future]."

Recovery Tracking Dashboard

Metric	Pre-Down	Month 3	Month 6	Month 12	Target
ARR	$___K				$___K
Growth	___%				___%
Burn	$___K/mo				$___K/mo
Runway	___ mo				18+ mo
NRR	___%				___%
Team size	___				___
Morale (1-10)	___				8+

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Quick Reference: Which Resource for Which Challenge

Challenge	Recommended Resources
"Planning to fundraise"	#377, #378, #391
"Need investor pipeline"	#379, #380, #381
"Preparing for meetings"	#382, #378
"Due diligence process"	#383, #374
"Financial model questions"	#384, #385, #386
"Term sheet negotiation"	#388, #389
"Difficult funding situation"	#393, #394

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