A Striking Explanation of VC Mechanics, Part 3: Downround protections

There are many articles out there explaining the mechanics of investment rounds. However, there are a range of founders who are still not confident enough about such VC and investment mechanics.

That’s why Iskender Dirik (MD at Microsoft Startup Growth Partners and Venture Partner at EQT Ventures), Christopher Mohrmann (Investment Associate at Bauer Venture Partners) and Peter Möllmann (Partner at Schnittker Möllmann Partners) decided to create a very striking, visual explanation of the most important mechanics via infographics.

The third infographic out of the series “A Striking Explanation of VC Mechanics” explains down round protections which can be found in the most VC term sheets. A down round is happening, if a new financing round is done at a lower valuation than the preceding financing round.

By showing an example of a simple allocation of shares of a hypothetic startup, it is visualized how the distribution of shares between the shareholders will change due to a down round without having a down round protection. As a contrast, it is shown which allocation of shares will be reached during a down round, if there is a down round protection (resp. “Anti-Dilution-Protection”) of an investor. Regarding the down round protection, the three most common forms (Narrow-Based Weighted Average, Broad-Based Weighted Average and Full-Ratchet) are presented.

Authors: Iskender Dirik (MD at Microsoft Startup Growth Partners and Venture Partner bei EQT Ventures), Christopher Mohrmann (Investment Associate at Bauer Venture Partners), Peter Möllmann (Partner at Schnittker Möllmann Partners).

www.id.vc/iskender-dirik