Down rounds and recapitalisation, survived

The most common cause is not a business collapse. It is a company that raised at a valuation set during a period of exuberant pricing, executed reasonably well, and now needs money in a market that prices the same performance lower. The multiple moved, not the company.

The second most common cause is a real miss: growth that stalled, a product bet that did not land, or a market that turned out smaller than the plan assumed. Both paths lead to the same negotiation, but the framing differs, and investors can tell which one they are looking at within a meeting.

Existing preferred shareholders usually hold anti-dilution protection that adjusts their conversion price downwards when new shares are issued more cheaply. Under broad-based weighted average, the adjustment is proportionate to the size of the new issue, which keeps the effect contained.

Under full ratchet, the earlier investor's conversion price resets entirely to the new price. A small down round can then hand a previous investor a much larger share of the company, and the dilution lands almost entirely on common holders — founders and employees.

A bridge from existing investors buys time without setting a new price, and works when there is a specific, credible milestone the bridge can reach. Where there is no such milestone, a bridge is simply a slower down round with extra fees attached.

Cutting to profitability is the strongest alternative when it is achievable. It removes the need to raise at all, and companies that pull it off frequently find that the round they eventually do raise is priced far better than the one they avoided. Venture debt fits narrowly: it works alongside real revenue and becomes dangerous when it is used as a substitute for equity.

A recap restructures the entire capital table rather than adding a layer to it. Existing preferred is often converted to common, sometimes at a fraction of its original value, the liquidation preference stack is cleared, and new money comes in on top with fresh terms. Old ownership is heavily reduced across the board.

The reason companies do it is that an overhanging preference stack can make a company unfinanceable and unsellable. If investors are owed a hundred million dollars ahead of common and the realistic exit is sixty, no new investor and no employee has a reason to participate. Clearing the stack restores the incentive to keep going.

Employee options struck at the old valuation are worthless after a repricing, and the people holding them are the same people needed to execute the recovery. A well-run down round includes a fresh option pool and, where legally available, a repricing or exchange of existing grants.

Handle the communication with the team directly and early. A recap that is discovered rather than explained produces resignations at the exact moment the company cannot absorb them. The honest version — the valuation was set in a different market, the business is intact, here is what your new grant looks like — retains far more people than silence.

Waiting is the expensive one. Every month spent hoping the market turns is a month of runway spent, and the terms available at three months of cash are dramatically worse than those available at nine. The decision to raise down should be made while there is still a choice.

The other mistake is a structured deal that preserves the headline valuation with layered preferences, ratchets and guarantees. It protects the optics and creates a capital structure so hostile to common shareholders that the next round has to unwind it anyway. A clean lower price is usually the cheaper outcome.

Garage to IPO simulates hostile financing conditions during downturn regimes: valuations compress, investors demand heavier preferences, and a company with short runway gets materially worse offers. Accepting one is often correct, and the preference stack it creates stays with you.

The consequence surfaces at the exit. Two runs with identical final valuations can pay the founder wildly different amounts, and the difference is almost always the terms accepted during the hardest quarter of the run.