Down Round Financing Explained

"A Dow Round Financing is a venture capital financing subsequent to initial venture financings in which investors pay less for the shares issued than previous investors.

Down-round financing sounds complex, but it really isn't, although a company's decision to do a down-round can be... Down-rounds were once seen as the financing option of last resort, to be exercised only when a company was in such dire straits that the only other options might be shutting the business or selling off the assets. They are more common today, especially among the survivors of the tech-wreck of the 1990s... The most common side effect of a down-round is the dreaded dilution. (In fact, the dilution can be so severe that the new investors take effective control of the company - these types of down-rounds are called "washouts" or "cramdowns" because they obliterate the initial investors)... The original investors often try to protect themselves by inserting anti-dilution provisions into their share subscriptions. These have the effect of increasing the number of common shares the investors can receive upon converting the preferred shares they received when they first invested...The catch is that as a prerequisite to their participation, the down-round investors usually require the original investors to waive many, if not all, of their anti-dilution rights. These and other prerequisites, such as "pay-to-play" provisions (which require existing investors to participate in the down-round), put the down-round investors in the catbird's seat by making their shares more valuable relative to the other outstanding shares."

Read more in this PLI - Pocket MBA article.