Before proceeding with a down round, and recognizing the significant negative consequences involved, it is crucial for the company's directors, legal advisors, bankers, and other consultants to carefully assess alternative strategies. These strategies include:
Conducting thorough and continuous market assessments to determine if a down round financing represents the best feasible option in the current market landscape. If financial resources allow, the company should consider enlisting the support of an investment bank or other advisory entity to aid in market assessments, competitive landscape evaluations, and exploration of strategic alternatives. Exploring other avenues for fundraising, such as issuing convertible notes (particularly if the cash flow issue is temporary) or pursuing outright sales of the company, should be considered. These market assessments and related due diligence should be meticulously documented in board minutes and other official records.
Decreasing the company's burn rate by implementing cost-cutting measures wherever feasible. While this is an apparent solution, it may face challenges due to commercial realities and constraints.
Opting for a flat round (a financing round where the pre-money valuation matches the post-money valuation of the previous round) by enticing investors with more favorable terms beyond the price per share. For instance, offering a preferred liquidation preference greater than 1x, issuing "participating" preferred stock, or providing shares with accruing dividends. Founders should carefully weigh the implications of these options with legal counsel.
Founders may seek to renegotiate the anti-dilution adjustments of existing investors to mitigate the dilutive impact of the down round. For example, existing investors might agree to waive their anti-dilution adjustments in exchange for other investor protections, such as pro rata rights (the right, though not the obligation, to purchase a proportionate share of future stock issuances).
If the Company still chooses to proceed with a down round financing, based on the lack of attractiveness of the alternatives in their situation, it should consult with legal counsel to mitigate any exposure of the deal to legal risks.
After considering alternatives, if the company still decides to proceed with a down round financing, it should take certain steps to avoid exposing the deal to excessive legal risks.
Comments