#120 VC Down Rounds & Broken Cap Tables

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In Case You Missed It: The Year-End CFO/Finance Checklists

We’ve seen a lot of different frameworks over the years to keep track of all the requirements for funds at year-end. One of our favorites is breaking things down into four buckets: portfolio companies, investor reporting, compliance/legal, and operations/HR. Here’s some of the top items in each bucket for year-end…

VC Down Rounds & Cap Table Impacts

A lot has been written about VC cap tables and down round impacts in 2023 and prior years. Some of our favorite prior takes / insights on this are here:

Recently, Chris Harvey shared an insightful post on down rounds and their second order effect: broken cap tables. He shares the following:

“With Down Rounds at 20%+ of all venture deals closed in 2023, a second order effect is coming into play: Broken cap tables. What are broken cap tables? Simply put, taking too much dilution, too early.”

Sam Altman said this about down rounds: “Don’t forget the prime directive of fundraising strategy: set things up so that you never do a down round.” 

“The badness of a down round is difficult to overstate; in fact, the threat of that is the best reason not to take a super high price when you’re offered one.” If you raise at such a price, everything has to go perfectly in order for your next round to be an up one.”

Here are the median founder dilution percentage decreases:• Seed: 20.5%• Series A: 19.5%• Series B: 17.2%• Series C: 12.6%• Series D: 10.3%

In sum:• Raise at the right valuation, not the highest valuation possible• Raise the least amount possible to achieve founder's goals

This is a chart showing the percentage of founder holdings post-round (+/- 5%), with different sections for different funding rounds and scenarios The chart ranges from 100% founder holdings at the pre-seed stage to 20% founder holdings at the Series D stage for the best-case scenario, and from 50% founder holdings at the pre-seed stage to 10% founder holdings at the Series D stage for the broken cap table scenario. The chart shows that founders can expect to lose a significant portion of their ownership in their company as they raise more funding rounds. This is because investors typically receive equity in the company in exchange for their investment. The amount of equity that investors receive is determined by the valuation of the company and the amount of money they invest. Founders can expect to retain more ownership if they raise less money at lower valuations.

Fund Model Updates at Year-End w/ Updated Dilution Numbers

As VC GPs & CFOs / Finance Pros update their fund models at year-end, they should take into account these updated dilution percentages! Happy modeling!

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