2 Common Down-Round Characteristics, Feat. Jiwire

VC Experts Intelligence Team

The genesis of the term "cram down" or "burn out" or "wash out" in early stage finance was the dilutive effect of the Series A round valuation and deal terms … including antidilution protection, warrant coverage, liquidation preferences as a multiple of cost, diluting the common shareholders (typically the founder and the players in the friends and family round) from a significant to a trivial position in terms of their percentage ownership of the company. The justification for that brutal dilution is, first, that the company needs the money and no one else is willing to put it in, including the common shareholders; secondly, the common are invited to participate in the round in order to protect their percentage interests and, if they didn't "play," they will "pay" by suffering the dilution; and, finally, that the fault, if there was fault, can be laid at the feet of the founder and other managers for an indifferent performance in running the business, which in turn occasioned the "down round."[1]

There are many investor-favorable terms associated with down-rounds that seek to improve the venture capitalists potential returns and reduce their risk exposure. Two examples of the common terms are below:

1. Increased Liquidation Preferences[2]

Liquidation preferences are a common feature of convertible preferred stock financings in development stage companies that enable investors to receive a negotiated amount prior to and in preference to the holders of junior securities (whether preferred or common stock) in the event of a liquidation, merger, consolidation, change of control, or other liquidity event.

In a down round market, many venture capitalists demand enhanced liquidation preferences (i.e., multiples of the original investment amount, in some cases even three or four times the original investment amount) as the price for consummating a new financing.

High-multiple liquidation preferences sometimes consume the entire proceeds of a liquidity event (other than an IPO) before other investors, employees, and founders of the company receive any payments on their stock.

2. Participating Preferred Stock[2]

Holders of a participating preferred stock are entitled to participate in the distribution of the remaining proceeds of a liquidity event on a pro rata basis with the holders of common stock after all liquidation preference entitlements of the holders of the preferred stock have been satisfied.>

In effect, a shareholder who owns participating preferred stock enjoys the upside of converting to common stock upon a liquidation event without having to actually convert and give up the right to a liquidation preference payment. Investors, of course, seek participating preferred stock as a means to increase their expected returns.

While investigating these terms we wanted to look at a company that had a recent down-round to see if these terms conformed to the two characteristics mentioned above. Looking at Jiwire and their recent Series D-1 issuance we noticed the price per share went from $1.59 Series C-1 to $0.15 Series D-1 which signaled the down-round. Further, the liquidation preference is Senior at 2X which does infact conform to the increase in liquidation preference. The stock type is also participating with common stock and there is no cap. We have provided the profile from VC Experts Intelligence database below for a more in-depth analysis. You can also download the PDF version that includes each round of financing with valuations and price per share for both common and preferred stock.

[1]Joe Bartlett, Founder and Chairman of VC Experts
[2]Michael Holloran, VC Experts Contributing Editor

VC Experts Private Company Profile

Preferred vs. Common Price Per Share With Valuation

Most Recent Financing Round

Date Amount Valuation Est. Fully Diluted Shares Preferred Price Per Share
11/18/2013 $9.16M $24,973,464 168,398,274 $0.15

Round: Series D-1 The Round helps indicate the stage of the investment, in this case Series D-1 is a Later Stage investment that often provides the financing to help a company get a threshold in order to position its shareholders for an exit event, for example, an IPO.
Direction: Down Round A Down Round is the issuance of shares at a later date and a lower price than the previous round of investment. Series D-1 had an issue price of $0.15 compared to Series C-1 which had a price of $1.59, therefore Series D-1 is a Down Round.
Liquidation Preference/Multiple: Senior, 2X Liquidation Preference is the amount per share that a holder of a given series of Preferred Stock will receive prior to distribution of amounts to holders of other series of Preferred Stock or Common Stock. In this case the holders of shares of Series D-1 Preferred Stock have a Senior Preference which means they will receive payment before any payment shall be made in repect of the Corporation's Series C-1, B-1, A-1 or Common Stock. This is usually designated as a multiple of the Issue Price, for example 2X or 3X, and there may be multiple layers of Liquidation Preferences as different groups of investors buy shares in different series. In this case Series D-1 will receive an amount equal to the sum of (i) 2 times the Original Series D-1 Price, plus (ii) all declared and unpaid dividends (if any). The trigger for the payment of the Liquidation Preference is typically a sale or liquidation of the company, such as a merger or sale of assets.
Stock Type: Participating Preferred A preferred stock entitles the owner to receive a predetermined sum of cash (usually the original investment plus accrued dividends), and also allows its holders to participate on an "as-if-converted-basis" with the common stock holders in any remaining proceeds of a defined "liquidation" event. The holder need not elect to convert or receive the liquidation preferred, hence the name "double dip". The right, however, to double dip may be capped at, say, the recoup of sale proceeds no greater than 2X, or two times the liquidation preference; to make more, the holder must convert.
Capped Participation:  No
Anti-Dilution: Weighted Average Anti-Dilution Provisions are contractual measures that allow investors in convertible preferred shares an automatic reduction in the conversion price, meaning more common shares on conversion, if a subsequent round is a "down round," thereby mitigating down round dilution. Weighted Average Anti-Dilution means the investor's conversion price is reduced, and thus the number of common shares received on conversion increased, in the case of a down round; it takes into account both: (a) the reduced price and, (b) how many shares (or rights) are issued in the dilutive financing.
Redemption: No Redeemable preferred stock, also known as exploding preferred, is redeemable its cost plus accrued dividends, at the holder's option after (typically) five years, which in turn gives the holders (potentially converting to creditors) leverage to induce the company to arrange a liquidity event. The threat of creditor status can move the founders off the dime if a liquidity event is not occurring with sufficient rapidity.
Cumulative Dividends: No The payments designated by the Board of Directors to be distributed among the shares outstanding. The type of share determines the amount. On preferred shares, it is generally a fixed amount. With common shares, the dividend can be omitted if the Directors decide to invest the money in a capital expenditure or if the business is slumping. If the dividend is paid, the amount varies depending on the amount of cash on hand. On a noncumulative preferred, omitted dividends will, as a rule, never be paid.
Dividend Rate: 8%
Pay to Play: Yes A "Pay to Play" provision is a requirement for an existing investor to participate in a subsequent investment round, especially a Down Round. Where Pay to Play provisions exist, an investor's failure to purchase its pro-rata portion of a subsequent investment round will result in conversion of that investor's Preferred Stock into Common Stock or another less valuable series of Preferred Stock.
Pay to Play Penalties: Conversion of Preferred Stock into Common Stock

Investment Amounts (M)

General Information

Company Information Key Management
• Address: 150 Post Street
• Geographic Region: Silicon Valley
• Industry: IT Services, Telecommunications
• SIC Codes: 7375 - Information Retrieval Services
• NAICS Codes: 519130 - Internet Publishing and
 Broadcasting and Web Search Portals
• Legal Counsel: Coblentz Patch Duffy & Bass LLP
• Company Website:
• Fordyce, Michael - CEO, Director
• Capitolo, Gregory - CFO
• Moragne, John - Director
• Albinson, Christopher - Director
• Lenet, Scott - Director
• Horowitz, David - Director
• Ruxin, Marc - Director
• McKenzie, Kevin - Founder, Director
• Staas, David - President
• Rose, Todd - SVP, Business Development
• Archibald, Greg - SVP, Sales
• Blyukher, Leonid - VP, Engineering
• Dixon, Mark - VP, Product
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