What is a down round and what does it trigger?

Key facts

• A down round is a funding round priced below the price per share of your previous round.
• It commonly triggers anti-dilution adjustments for existing preference shareholders.
• New allotments engage statutory pre-emption rights under the Companies Act 2006 unless properly disapplied.
• Expect option-repricing and morale questions where employee options sit above the new price.
• As with any share issue, form SH01 must be filed within one month of allotment.

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What counts as a down round?

A down round is a round at a lower price per share than your last one. Price per share is the honest test — headline valuations move with share counts, so compare what a share cost then with what it costs now.

It usually arrives with context: a bridge that became a repricing, a market that turned, a milestone that slipped. Legally, none of that matters — the trigger is simply new shares at a lower price.

One clarification: an ASA converting at its agreed discount is not a down round. That pricing was agreed upfront; the label attaches to a new round priced below the previous one.

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What does a down round trigger in your documents?

Check three places: the shareholders' agreement, the articles of association and any outstanding convertible instruments. A round priced below the previous one commonly triggers anti-dilution adjustments for existing preference holders — and it wakes up every consent right your investors negotiated.

If your shareholders' agreement lists new share issues among reserved matters (decisions needing investor consent), you need those consents whatever the price; expect the questions to be sharper when the price is lower.

Outstanding ASAs and notes convert at a discount to the new, lower price, compounding the dilution. Model everything together — new money, anti-dilution shares, converting instruments — before you agree the headline number.

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How does anti-dilution protection bite?

Anti-dilution terms protect preference investors when you issue shares below the price they paid, by adjusting their conversion terms so they end up with more shares. The harshest version, the full ratchet, resets their price entirely to the new round's price; a weighted-average formula — the softer, more common-sense version — moves the price only partway, reflecting how many cheap shares were actually issued.

Either way, the extra shares do not come out of the new investor's allocation. The dilution concentrates on holders without protection — typically founders and employees.

Waivers are possible: anti-dilution is a contractual right, and its holders can agree to soften or waive it as part of the round's negotiation. That conversation is easier had early.

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What does UK company law require for the new issue?

The same discipline as any allotment, under more pressure. Directors need authority to allot the shares, and the Companies Act 2006 gives existing shareholders statutory pre-emption rights — first refusal on new shares issued for cash — unless those rights are properly disapplied or excluded.

Then come the completion mechanics: board and shareholder resolutions, register updates, and form SH01 filed at Companies House within one month of allotment.

A down round is exactly when procedural corners get cut, and exactly when an aggrieved shareholder is most motivated to examine them later. Paper it properly.

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What does a down round mean for your team?

Expect morale and option-repricing questions. Options granted with exercise prices above the new share price sit "underwater" — they stop feeling like compensation, and the market practice question of whether to reprice or regrant them lands on the board's desk.

Handle it openly. Explain what the new price means for the team's options, and take advice before repricing or regranting — option schemes carry their own tax and eligibility consequences that are easy to trip.

Communication is the underrated legal tool here: a funded company at a lower price beats an unfunded one at last year's valuation, and saying that plainly is part of executing the round.

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Worked example

Fatima and Rob, founders of a proptech marketplace, raised £1m at £2.00 per share in their Series A — 500,000 preference shares. Eighteen months later growth has stalled, and the only offer on the table is £600,000 at £1.20 per share: a down round.

Their Series A investor holds full-ratchet anti-dilution. The adjustment treats the original £1m as if invested at £1.20 — around 833,000 shares, roughly 333,000 more — with the dilution falling on the founders. The incoming investor receives 500,000 shares for £600,000. After hard negotiation, the Series A investor accepts a weighted-average recalculation instead, softening the hit; consents are signed, pre-emption is disapplied, and the SH01 is filed within the month.

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Where founders go wrong

• Discovering anti-dilution at the term sheet stage

  — read your existing shareholders' agreement and articles before pricing the round, and model the adjustment alongside the new money.

• Ignoring pre-emption and consents

  — statutory pre-emption under the Companies Act 2006 and any reserved matters need handling before completion, not after.

• Leaving the option pool underwater

  — options priced above the new share price stop motivating anyone. Put the repricing question on the board agenda, with advice.

• Spinning the round to the team

  — employees can do the maths. Being straight about what the new price means costs less than the trust you lose otherwise.

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Related questions

Is a down round always bad?

It is dilutive and it stings, but a funded company at a lower valuation beats an unfunded one at last year's number. The legal work is about containing the knock-on effects — anti-dilution, consents, the option pool — so the company that emerges can still motivate its team.

Do converting ASAs or notes make a round a down round?

No — an ASA converting at its agreed discount is just the instrument doing its job. A down round means new shares priced below your previous round. But if the round genuinely is down, convertibles convert at a discount to that lower price, compounding the dilution.

Can existing investors block a down round?

Often they hold levers: if new share issues appear in your reserved matters they must consent, and statutory pre-emption rights under the Companies Act 2006 give existing shareholders first refusal unless disapplied. In practice a down round is negotiated with existing investors, not around them. [More: What are reserved matters (investor consent rights)?]

What is anti-dilution protection?

A term compensating preference investors if you later issue shares below their price: their conversion terms adjust to give them more shares. Weighted-average formulas adjust proportionately; a full ratchet resets their price to the new round's entirely. The cost lands on unprotected holders — typically founders and employees. [More: What is anti-dilution protection and how does it work?]

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A down round is the highest-friction round you will ever close: every clause your last investors negotiated is suddenly live, and the dilution maths punishes anyone who models it late. A SuLe solicitor can map the triggers in your existing documents and negotiate the softenings that keep the company fundable. Book a free term sheet review before you agree the new price.

Keep reading: What is a priced round vs a convertible round? · How do a discount and a valuation cap work together in a convertible? · What is a valuation cap and how does it work? · What is a term sheet — and is it legally binding? · What is a ratchet? · What are pre-emption rights — and how are they disapplied?

Primary sources: Companies Act 2006