Raising Capital During a Crisis – Avoiding Down Rounds

March, 2024 / EKW

At the present time, raising capital is becoming an increasingly difficult challenge, and one can say it with certainty when it comes to young technology companies. Even older companies are facing significant difficulties in raising capital, especially when it comes to capital values that are decreasing.

In cases where capital is raised subject to a share’s value that is less than the previous round (“down round”), this will often be a trigger for mechanisms that will benefit the previous investors in the company, almost always at the expense of the holders of ordinary shares (entrepreneurs and employees). This is why companies try by all means to avoid down rounds, as we will try to elaborate further in this article.

Initial Investment Rounds

Technology companies that raise capital as part of an initial round of investment (Pre-seed and Seed financing) are often forced to grant significant rights to investors in the companies.

Therefore, part of these rights can be a function of the future share price of the additional future fundraising the company will carry out. In cases where in future fundraisings the value of the shares has decreased compared to the current round, the current investors will receive diverse compensation for their investment: additional shares without payment of money to the company (anti-dilution clauses), preferential rights in the company’s board of directors, comparison of preferential rights with future investors (MFN), etc.

Therefore, the company has a significant interest not to determine a low share value in comparison to the previous round.

Capital Raisings in Decreasing Values (Down Round)

The initial expectation of any company raising capital is that future financing will always be of increasing value. Thus, the understanding that the company’s product/service is developing, the company is recruiting more workers, and there are even paying customers, should affect the value of the enterprise and the company’s attractiveness in the eyes of investors.

In some cases, whether there’s a direct relation to the company or not, the company fails to raise capital at a higher value than in previous rounds. Often, it has nothing to do with the company or its business. Many times, it is related to worldwide macro events (recession, COVID, wars, etc.) that affect the ability of companies to raise funds, and the willingness of professional investors to invest money in new ventures. Consequently, the value of the companies decreases, and if they manage to raise capital at all, it is raised according to values lower than the previous rounds of financing.

Considering the above, the company, as well as the entrepreneurs (as owners of ordinary shares) have a heightened interest in trying to avoid, as much as possible, a lower share value for the company than in previous rounds.

For this purpose, the companies can act in two main ways:

First, turn to recruitment channels that do not require fixing the current value of the company. Between choosing to raise through a convertible loan or through a SAFE (Simple Agreement for Future Equity) raise, in both paths there is no present value for the company and its shares, and the value discussion is postponed to a future fund raising, in the hopes that the market will wake up and be more attractive to companies who are interested in raising capital.

Second, companies can grant investors in the current round preferential rights, and this, despite a lower share price, serves as a form of compensation that will be given to the investor. Preferential rights such as: diverse rights at the liquidation preference level, preferential rights to dividends, preferential rights in decision-making, etc. are all rights that investors in the current round can receive despite the reduction of the price per share below its price in previous rounds.

It should be understood that the current investors, who probably sit on the company’s board of directors, are meant to approve future investments in the company. These investors can raise objections to such excess mechanisms or forms of raising capital that do not determine a current value for the company, but this is a topic for additional articles.


Determining a low value for the company compared to previous capital fund raising can be a trigger for mechanisms that will deeply damage its share capital. Entrepreneurs often try to bridge complex situations by raising capital, either through capital raising which postpones the determination of the company’s value for future raising, or by granting significant rights to investors despite setting a low share price.

Any such situation will surely reach the company’s board of directors, which must accept all the considerations for and against such a move and try to isolate the interests of the previous preferred shareholders in the company, compared to the ordinary shareholders (entrepreneurs and employees). Obviously, this is not a simple matter, but the alternative can be even more dramatic for the company and its shareholders (in total).


For further information, please contact:

Hanan Efraim, Attorney                             Ofer Inbar, Attorney

Office Tel: +972-(0)3-691-6600                +972(0)3-691-6600

Email: hanan@ekw.co.il                               ofer@ekw.co.il