The article also highlights that down rounds can be stressful for founders as they and their employees end up with a smaller ownership percentage of the company. However, investors can incentivize people through down rounds, such as establishing a bonus pool to reward the team if they achieve specific growth targets. The article ends by questioning the future of AI companies raising capital at high valuations, with some believing that there are overinflated valuations in the market.
Key takeaways:
- Startups may have to resort to down rounds, new financings at a lower valuation than the company’s previous price, due to unexpected challenges such as a global health crisis or a sudden surge in interest rates. However, these deals don’t necessarily have a devastating impact on a startup’s future.
- Down rounds have become more common, with their prevalence as a percentage of all deals more than doubling from 7.6% in 2021 to 15.7% in the first half of 2024, according to PitchBook data.
- Investors can incentivize employees and executives to remain committed after a down round by establishing a bonus pool to reward the entire team with cash bonuses if they can achieve specific revenue growth targets.
- There is concern over the high valuations of many AI companies raising capital, with some believing that these valuations are overinflated. However, it is still hard to tell which AI companies will succeed due to the competitive nature of the market.