Venture Capital Advisory: When Low Prices Happen to Good Companies...What to Do in Preparation for a Down-Round Financing


As we are now firmly entrenched in a challenging economic environment, many private companies will find it very difficult to raise capital on acceptable terms. For private companies, the sealed IPO window continues to place downward pressure on valuations as the opportunity for liquidity through a public offering is likely to remain closed for investors for the foreseeable future. Coupled with the present liquidity crisis and the recession, these pressures are likely to result in lower valuations for many companies in the capital markets (even promising, well-managed companies). In light of all this sobering news, senior managers and directors should anticipate the possibility of a down-round financing. Complicating the situation is that the only capital available may be from insiders and, under such circumstances, directors need to be particularly careful so that they do not subject themselves to lawsuits from other shareholders and potential liability. In order for directors to mitigate against potential liability and to protect themselves against fiduciary claims, process and good corporate governance procedures are important. Here are a few practical tips for how to prepare for a down-round financing.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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