TLDR:
A down round is a funding round in which a startup raises capital at a lower valuation than its previous round, diluting existing shareholders and often signaling challenges in the business.
Managing a Down Round
Surviving a down round requires proactive stakeholder management. Founders must communicate transparently with employees — many of whom may see their options go “underwater” (exercise price higher than current share price) — explaining the business rationale and path to recovery. Existing investors who are not participating in the down round must be carefully managed, as non-participating investors may have their preferred stock converted to common stock under pay-to-play provisions.