No Match Found
When the market resets equity valuations, new financing rounds may be “down rounds” in which companies issue stock at lower prices than previous rounds. They are typically perceived negatively and can weaken investor confidence and employee morale.
“Down round protection” is a common feature in many instruments — including warrants, convertible notes and convertible preferred stock — that limits the dilution to existing investors. But companies should consider the financial reporting impact to existing instruments with down round protection to help prevent surprises and filing delays. For new instruments with down round protection issued by both public and private issuers, there may be a path to simplify the accounting impacts if the financing documents are evaluated prior to closing the round.
Down round protection provisions typically lower the exercise price of an instrument and may increase the number of shares issued upon exercise or conversion of the instrument. While often characterized as “standard anti-dilution” features by market participants, down round protection provides incremental value to investors over traditional adjustments for stock splits, dividends and below-market repurchases or issuances of equity. The accounting literature has specific guidance for down round protection that differs from more basic anti-dilution provisions.