U.S. VC Market Sees Sharp Downturn as Down Rounds Surge
The stock market today has witnessed a significant downturn since the post-COVID boom, with deal volume plummeting and valuations taking a nosedive. Meanwhile, questions surround the leadership of the board regarding the Kramdown rounds in 2023.
The market decline is attributed to various factors, including moribund IPO and M&A markets, geopolitical instability, limited debt financing, and recession fears. This has led to a surge in down rounds, including cramdown, pull-up rounds with draconian terms such as full-ratchet antidilution and pay-to-play provisions. Overall deal volume dropped by 61.8% in Q4 2023 compared to Q4 2021.
To establish a fair process and price in down rounds, boards can create independent committees, seek non-participating stockholder approval, explore other alternatives, keep accurate records, conduct rights offerings, and ensure full disclosure. They can also obtain a 409A valuation and consider fairness opinions, as well as research comparable transactions. However, financing structures that dilute minority stockholders may face challenges under Delaware law, especially if the board is conflicted or influenced by a controlling stockholder.
The decline in the U.S. stock market has led to more common down rounds with unfavorable terms. To maintain fairness, boards must follow strict processes and consider various valuation methods. The legal landscape also poses challenges to certain financing structures.
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