A down round occurs when a company issues new equity at a price per share lower than the price paid by investors in a prior round, implying that the company's valuation has declined. Down rounds result in dilution of existing shareholders and can trigger anti-dilution protections held by preferred stockholders.
Anti-dilution provisions — typically 'broad-based weighted average' or 'full ratchet' — adjust the conversion price of earlier preferred shares to compensate investors for the reduced valuation. Down rounds are reputationally sensitive for founders and can signal operational challenges, though they are sometimes used strategically to reset valuations inflated during frothy market conditions.