Does it ever make more sense to raise a structured round instead of accepting a valuation cut?

by Ana Lopez

Venture capital financing continued its slump through late 2022, and there are no real signs that things will pick up again for a while. That means more doom and gloom for startups looking to raise money.

Many startups that tried to avoid a regular round in 2022 – or turned to an alternative to hold them back – will find themselves in a difficult cash position this year and will have to try to raise.

In the process of securing the necessary funds, they may have to raise a down round – which consists of a raise at a lower valuation than their previous one – or enter into a deal riddled with legal terms and structures designed to discourage investors protect against negative consequences.

Many startup founders won’t be able to choose which deal they’d rather close, but some will, and there are a few things to consider when deciding which one is right for you.

Several investors have recently pledged Twitter and news outlets to express that companies are better off going down and seeing their valuation fall than adding a lot of structure and investor preferences to a deal. Though founders only get so much choice here.

Though of course we’re not looking to provide one actual legal advice here, this recent focus on down rounds got me thinking, is that better than a structured round every time? Is there also a downside, even if investors are touting rounds? I asked some lawyers to get a better idea.


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