Venture capital funding continued its slump through the end of 2022, and there aren’t any real signs things are going to pick back up for a while. That means more doom and gloom ahead for startups looking to fundraise.
Many startups that tried to avoid raising a regular round in 2022 — or turned to an alternative to hold them over — will find themselves in a tough cash position this year and will have to try to raise.
In the process of securing the funds they need, they may have to raise a down round — which consists of raising at a lower valuation than their last — or take on a deal riddled with legal terms and structure meant to provide downside protection to investors.
A lot of startup founders won’t have a choice as to which deal they’d rather take, but some will, and there are some things to keep in mind when deciding which one might be the better fit.
Multiple investors have recently taken to Twitter and news outlets to express that companies are better off taking a down round and seeing their valuation cut than adding a bunch of structure and investor preferences to a deal. Although founders only get so much choice here.
While, of course, we aren’t looking to provide any actual legal advice here, this recent focus on down rounds did get me thinking: Is that better than a structured round every time? Also, even if investors are touting down rounds, is there any downside? I asked some lawyers to get a better idea.