Down-round Protection

Down-round protection is a term that is frequently seen in equity financing term sheets. The good news is that if everything goes as planned for your startup, this term has no effect. However, in the event that things don't go as planned and your venture decreases in value between rounds of financing this term can kick-in and really punish the founders.

At the highest level, this term means that if the valuation at a round of financing (pre-money) is lower than it was at the previous round of financing (post-money), the investors from the earlier round get "made whole" by getting more stock issued to them. With the founders getting what's left over -- resulting in the founders accruing all of the decrease in valuation. For some examples and more conversation on this topic click the 'More Info' link below.

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