For the thousands of privately held companies that are not able to take advantage of access to the public equity markets, venture capital and private equity remain the primary, if not the only, available sources of growth capital. When a company’s enterprise value has declined since its earlier rounds of equity financing and it still needs capital, the company may be faced with a “down-round” financing in which the new investors are offered better price, protections, management rights, board of director control, or other terms than those provided to the prior investors. Not surprisingly, prior investors (which frequently include the company’s founders and possibly its current management) oft en object to the level of economic dilution and loss of control that typically is expected of them in a down-round fi nancing. However, these objections may become a problem (also known as “litigation”) if the new investment, or the process by which it was arranged, runs afoul of laws which protect the prior investors from inequitable treatment. Th is article identifi es some of the challenges presented by down-round fi nancings and explains steps that the company, its board of directors, and the new investors can take to anticipate and overcome them.
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Reprinted with permission from Dallas Business Journal.