Down rounds / exits at low valuations - Options on legal side
In the private markets, we are witnessing a significant decline in valuations.
This shift signals a time for recalibration, potentially leading to recapitalization, down rounds, and the triggering of anti-dilution and liquidation preferences.
1. Recapitalization
Recapitalization involves increasing founder equity and decreasing investor equity, aiming to make companies fundable again. Various strategies can achieve this, which will be covered in a future thread.
2. Down round
In a down round, investment occurs at a lower valuation than previous rounds, triggering anti-dilution adjustments.
While full ratchet anti-dilution is uncommon, it's gaining attention in current market conditions.
Most common is broad-based weighted average anti-dilution.
It adjusts valuation, but not as drastically as full ratchet, balancing between previous and current valuations.
Convertible notes or SAFEs are also used, where valuation falls below the cap without triggering anti-dilution. This is a flexible but complex funding mechanism.
3. Exit scenarios In exit scenarios, liquidation preferences come into play.
Investors receive their investment amounts pro-rata or as per their liquidation stack, with senior preferences paid first.
4. Shut downs
Company shutdown is usually the last resort due to operational complexities.
Unfulfilled commitments, like annual subscriptions not fully served, add to the challenges in a shutdown.
My View
Despite the current 'bloodbath' in valuations, it's a survival of the fittest.
Those who adapt may find themselves at the forefront of the next upcycle in the market. In summary, the current market downturn is a reset button, bringing both challenges and opportunities.
Startups that navigate this phase effectively can emerge stronger for the next growth cycle.
#PrivateMarkets #StartupFunding #MarketAdaptation #SurvivalOfTheFittest #MarketInsights #StartupResilience
You can read the unrolled version of this thread here: typefully.com/Akhil_fca/xPyX4gw