Sometimes companies find that their business is worth less than they originally planned. While this is an unfortunate situation, it can be easy to find yourself in this problem. This article goes in-depth about down rounds, how to avoid them, and what to do if you find your business producing down rounds.
What are Down Rounds?
As Investopedia explains, down rounds involve shares in a company. When a company notices that its capital is lower in the current financing round, it will sell more shares at a lower price than it originally had. Down rounds are not ideal for companies- as the idea for businesses is usually their share prices will rise as their business continues to grow. A decrease in share prices shows that the company is struggling financially, and investors will become hesitant to invest in the business, or your current investors may even pull out if they see a sudden loss of money.
Effects of Down Rounds
Down rounds can affect a company negatively in multiple ways. While it’s hard financially for a company to deal with selling their shares at a lower price than they originally had, there are a few other problems that come along with down rounds that can affect your company as a whole and may result in even more financial problems.
- Loss of Confidence: Releasing down rounds can affect not just the finances of the company, but the morale throughout the entire company. It can cause a stir in employees, who might be suddenly worried that their job is on the line, or cause investors to be hesitant to provide capital for a company that has just lost money. Down rounds are not ideal and can cause bigger issues when trying to build confidence and trust between investors and employees.
- Unattractive: While you may have a steady and thorough plan for your business when an investor or bank sees that you have down rounds, it can affect your company’s image. Investors, banks, and anyone who may be interested in backing your company will see that you are struggling for cash, and may be hesitant to invest in a business if they know that they are having a difficult time.
- Loss of Ownership: The more shares you put out, the less control you will have of your own business. Shares give investors a say in all financial decisions your business takes a part of. The more shares you have out, the less ownership you will have in your company, meaning that you may have to follow the investor’s ideas, even though you might not necessarily agree with their point of view. This can be frustrating and difficult for you as the owner.
How to Avoid Down Rounds
Avoiding down rounds is easier said than done. Even if you have a well-thought-out strategy to help your company grow, things don’t always go according to plan. Your best method of action is to make sure you plan well and assure every dollar is accounted for. Sticking to your budget and finding ways to minimize operation costs is always a smart, safe way to ensure that your company makes a profit that interests investors. Raising funds for your company should be your number one priority, and you should hold off on spending your capital on small things until you are fully confident in your financial standing.
Alternatives for Down Rounds
Down rounds are not ideal for your company. With several negative effects that will put your company at risk, it is in your best interest to avoid them at all costs. There are several ways to avoid down rounds, as they can be considered an absolute last resort if your company is struggling for money. Here are a few alternatives to consider before you turn to down rounds to help your business.
- Bridge Financing: Bridge financing is a short-term option that companies can use to save their financial records until a long-term option can be found. Bridge financing usually comes through an investment bank, in the form of a loan or investment. Bridging can help give you and your company a little more time to figure out the best plan of action to get your finances back on track.
- Turn to Current Investors: Ideally, you want to minimize the number of shares your company has. As the owner of your business, you want to make sure you have a say in your own business, and so putting a cap on how many investors you have is ideal in the long run. If you have investors as you are currently considering down rounds, it may be time to reevaluate your original contract with them and renegotiate the original terms. While this may result in a loss of confidence by being transparent, other investors may appreciate the honesty on your part and would be willing to hear the new terms and come to an agreement with you.
- Shut Down: Shutting down your company is not ideal. This may be your absolute last resort, and turning to down rounds may seem more appealing than ending your company. However, this is an option that may need to come into consideration when dealing with a loss of profit in your company. Many financial advisors consider this better than racking up a large amount of debt attempting to save your company or hurting your relationship with current investors or employees.
While a sudden loss in financial stability can be overwhelming to a company, there are several ways to find help and avoid the worst-case scenarios. An advisor like Intrepid Finance can look at your financial reports, and tackle the best strategies for you and your company. With a Intrepid Finance, your stress can be managed and help you conquer any problems that may come with building a company from the ground up. Intrepid Finance can help guarantee that you avoid pitfalls like down rounds, and ensure that your company can get the capital it needs to thrive and grow.