US startups partied pretty hard in 2021, had a serious hangover in 2022, and took some prescription strength medicine in 2023 in the form of down rounds.
The down round is no one's idea of a fun time. But nearly 20% of all the rounds on Carta this past year were down rounds.
You can see that later stage companies were disproportionately impacted by this trend - and they typically saw their valuations fall by larger percentages to boot.
My view: this is actually a good thing.
Not in the moment, of course. Down rounds are tough to explain to new investors, to current employees, to anyone interested in the company. They come with headaches not unlike a wicked hangover.
But they also, if done cleanly, set up the company in a much healthier position, without the overhand of an inflated valuation. If the choice is down round or shutdown, that's a pretty easy choice.
Founders should keep an eye on their term sheets for just such a moment. If the company has already agreed to onerous terms, in particular the dreaded full-ratchet anti-dilution provision, the down round effect moves from "a couple glasses of wine" to "Jägerbombs for no reason".
Usually this space is reserved for Carta shoutouts, but our good friends at Deel just released their State of Global Hiring Report for 2023.
As a purveyor of data reports myself, I can safely say this is worth your reading time! The Carta compensation lookback for last year drops sometime in February and this is a great companion piece.
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Peter Walker
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