How Cash-Needy Private Companies Are Avoiding Dreaded Down Rounds
Few rules govern private markets, but some companies’ confidential maneuvers to bypass a valuation hit could raise eyebrows.
Illustration: Arnaud Aubry for Bloomberg Businessweek
For startups that rode the tech boom to soaring valuations, few things are harder to swallow than the dreaded down round. It happens when backers throw fresh money at a fast-growing business and demand more equity than previous investors got for a similar amount of cash. The result is a decline in value—sometimes by an embarrassing amount.
It’s such a badge of dishonor in Silicon Valley (not to mention alarming to employees with stock options) that private companies and investors are coming up with inventive workarounds. Private markets have few disclosure requirements, so most of the maneuvers aren’t made public. “What they try to do is sort of defeat reality,” Tom Slater, a Baillie Gifford fund manager whose firm buys stakes in private companies, said at a conference earlier this month. “Do you want to accept reality that your valuation has fallen by 50%? Because that’s potentially quite disruptive internally.”