All About Term Sheets: Down Rounds

In Part I of our series on term sheets, Closing Time hosts Halle Tecco and Michael Esquivel tackle the reverberations from the term sheets of yesteryear. With the generous valuations and optimistic multiples of 2021—many startups now find themselves struggling to justify these figures in the current economic climate. 

The hosts delve into the nuanced reality of flat and down rounds, dissecting their implications for founders and investors alike. They posit that while no one truly wins in a downround, it's a shared and necessary hurdle in the long race of business growth. Addressing the trend that "flat is the new up," they emphasize the importance of clean terms during down rounds, and suggest strategies to minimize the impact on employee morale and equity. 

Here are some key pieces of advice from this episode:

1. Prioritize clean terms over headline valuations

Choose simplicity. Shift your focus from headline valuation numbers to clean terms. Avoid the complications of structured rounds for a more secure and straightforward financial future. In other words, take your medicine, do a down round, and keep it simple.

2. Safeguard your earliest supporters

Shield your early believers. If you have to use pay-to-play mechanisms, explore legal exemptions based on share thresholds to protect your angel investors during the downturn. They believed in you back then, so look out for them now.

3. Empower employees through the storm

Support your team. Offer investment opportunities to employees and establish substantial option pools. Transform demoralization into motivation by involving them in the process and increasing their upside.

 4. You got this

Embrace the journey. There are going to be hurdles and challenges in every startup journey. Recognize flat and down rounds as just a part of the entrepreneurial experience. This is just one moment in time.