A down round is a financing at a lower price per share than an earlier round. For founders and employees, the resulting ownership depends on the new shares issued, existing investor protections and any option-pool change. The headline valuation alone cannot show the effect.
Compare the price per share
Cooley’s explanation of down rounds starts with the price paid for a share. That is a more precise comparison than two valuation headlines because the number of shares and the terms of the securities can change between rounds.
Ask for the fully diluted capitalisation table before and after the proposed financing. Separate issued shares, options already granted, an unallocated option pool and convertible instruments. The categories matter when calculating the denominator.
A lower valuation can coincide with a larger cash raise, a pool increase or amended preferences. Each changes a different part of the economics. For the earlier financing terminology, read how to interpret a funding round.
A simplified example
Suppose a company has 10 million shares and raises $5 million at $1 per new share. It issues 5 million shares. The simplified post-round total is 15 million.
An employee holding 100,000 shares owned 1% before the financing and owns about 0.67% afterwards. Their share count stayed the same; the denominator increased. This example excludes options, convertibles, anti-dilution adjustments and transaction costs.
| Measure | Before | After |
|---|---|---|
| Total shares | 10,000,000 | 15,000,000 |
| Employee shares | 100,000 | 100,000 |
| Employee ownership | 1% | About 0.67% |
| New investor shares | 0 | 5,000,000 |
These are hypothetical figures, not a company’s results. Change the assumed price to $0.50 while keeping the $5 million investment: the company issues 10 million new shares, the total becomes 20 million and the employee’s percentage becomes 0.5%. The arithmetic isolates the effect of a lower price with the same cash raised.
Investor protection can change the result
Cooley distinguishes full-ratchet and broad-based weighted-average anti-dilution protection. A full ratchet resets the relevant conversion price by reference to the lower financing price. A weighted-average mechanism also takes account of the financing’s size relative to the existing capitalisation.
These rights belong to particular securities under their documents. “Investors are protected” does not mean every holder keeps the same ownership percentage. An adjustment can increase the common shares into which earlier preferred stock converts, affecting holders without that protection.
Use the actual charter and financing documents to model the adjustment. A standard dilution calculator is useful for ordinary issuance, but cannot infer contractual terms from a valuation. WPBV’s dilution calculator is a starting point for transparent assumptions.
Employee options need a separate calculation
An option’s exercise price, vesting and exercise window remain distinct from the financing price. A new investor’s preferred share and an employee’s right to buy common stock are different instruments.
Do not treat the latest preferred-share price as a guaranteed cash value for employee options. First identify the option’s terms and the type of share it buys. Then ask whether the company has approved any repricing, replacement award or other change. A down-round announcement alone is not evidence that an award changed.
The employee stock-options guide explains the terms to gather. Liquidation preferences matter separately when comparing ownership with potential exit proceeds.
Read the financing as several decisions
For an internal explanation, show ordinary issuance before layering on anti-dilution and pool changes. Label every assumption. That makes it possible to identify why two spreadsheets produce different percentages.
A useful request to the company is specific: “Please show my share count and fully diluted percentage before and after the financing, including any conversion adjustment and option-pool increase.” For contractual or tax consequences, use the relevant documents and qualified advisers.
