Down round: what it means for Indian founders and ESOPs

Not every round goes up. When a startup raises at a lower price per share than its last round, the new money arrives on worse terms for everyone already on the cap table.

The lower price is only the start. Anti-dilution clauses, ESOP exercise prices and Indian pricing rules all react to it, and founders who model those reactions early negotiate from a stronger position.

What is a down round?

A down round is a funding round in which a startup sells shares at a lower price per share than in its previous round. A flat round repeats the previous price. In both cases earlier holders see a lower paper value, and the round can trigger protections written into earlier term sheets.

Down rounds tend to follow a missed plan, a cooler funding market or a previous price set too high. The valuation can fall even when the company has grown, because new investors price the next milestone, not the last one.

What the data shows in India

We found no public tracker that counts flat and down rounds in India year by year, so treat these signals as partial. Citing Tracxn data, Outlook Business reported on 13 June 2025 that as many as 55 startups across fintech, SaaS and consumer internet had raised at lower valuations. The report gave no time period for that count. It did not give the period.

One example it cited: Cred raised $75 million at a $3.5 billion valuation, nearly 45% below its $6.5 billion peak. The wider market is selective too. Tracxn's 9M 2026 report counted 1,134 Indian tech funding rounds to 21 September 2026, down 38%, even as funding rose 7% to $10.3 billion.

How does anti-dilution protection work in a down round?

Anti-dilution protection lowers an earlier investor's conversion price when new shares are sold below it, so that investor's preference shares convert into more equity shares. A full ratchet resets the price to the new, lower price. A weighted average moves it only part of the way, depending on how many new shares are issued.

In Indian rounds the clause often works through the conversion ratio of compulsorily convertible preference shares. It is one of the four term sheet clauses every angel should read, and a down round is when it starts to cost someone.

Sample: the same down round, two clauses

Sample, illustrative: a Series A investor paid Rs 10 crore for 10 lakh CCPS at Rs 100 each, with 1 crore shares outstanding on a fully diluted basis. The down round sells 20 lakh new shares at Rs 50 each, raising another Rs 10 crore.

Sample	Full ratchet	Broad-based weighted average
New conversion price	Rs 50	Rs 91.67
Series A converts into	20 lakh shares	About 10.91 lakh shares
Extra shares to Series A	10 lakh	About 91,000

The weighted average uses old price × (A + B) ÷ (A + C). A is the shares outstanding before the round, B is the shares the new money would have bought at the old price, and C is the new shares actually issued. Here that is Rs 100 × (1 crore + 10 lakh) ÷ (1 crore + 20 lakh), or Rs 91.67.

Every extra share the protected investor receives comes out of everyone else, mostly founders and ESOP holders. A down round also pushes the liquidation preference stack closer to the likely exit value, so model both clauses together.

What happens to ESOPs in a down round?

Options whose exercise price is above the new share price are underwater: worth little on paper, and a weak reason for staff to stay. Options priced lower are still worth less than before. Indian rules let a company change unexercised options, but the change needs a special resolution and must not hurt option holders.

Under rule 12 of the Companies (Share Capital and Debentures) Rules, 2014, a company sets the exercise price, and rule 12(5)(a) lets it vary the terms of options not yet exercised by special resolution, if the variation is not prejudicial to option holders. A lower exercise price favours holders, but still goes to shareholders.

Tax follows the share price down. Section 17(1)(d) of the Income-tax Act, 2025, in force since 1 April 2026, taxes the value of shares allotted at a concession as a salary perquisite: fair market value on the exercise date, less what the employee paid.

For an unlisted company, rule 15 of the Income-tax Rules, 2026 requires that fair market value to come from a SEBI-registered category I merchant banker, on a date no more than 180 days before exercise. A fresh report after a down round can lower the perquisite. The ESOP basics for founders cover vesting and pools.

What do Indian rules add to a down round?

Indian law sets floors on price, not ceilings. A company can't issue shares below face value except as sweat equity, a preferential allotment needs a registered valuer's price, and shares sold to a foreign investor can't be priced below a certified fair value. A down round is legal as long as it clears all three.

• Face value: section 53 of the Companies Act, 2013 bars issuing shares at a discount, except sweat equity under section 54.
• Registered valuer: section 62(1)(c) requires the price of a preferential allotment to be set by a registered valuer's report.
• Foreign investors: the RBI's Master Direction on foreign investment sets the floor at a fair value worked out by an internationally accepted method and certified by a chartered accountant, a SEBI-registered merchant banker or a practising cost accountant. The certificate can be no more than 90 days old on the date of investment.

The floor is today's fair value, not the last round's price, so a lower price is fine if a fresh valuation supports it. Within 30 days of issuing the shares, the company files Form FC-GPR under the FEMA reporting regulations.

The catch for foreign-held CCPS

For convertible instruments held by foreign investors, the Master Direction says the price or conversion formula must be fixed upfront at issue, and the conversion price can't fall below the fair value worked out at that time. A full ratchet that would cut a foreign holder's conversion price below that figure runs into this rule. Ask counsel how your clause handles it.

A down round resets the price once. The anti-dilution clause decides who pays for it.

What should founders do before accepting a down round?

Model the round on the fully diluted cap table before signing anything: the anti-dilution adjustment, the liquidation preference stack and the ESOP pool together. Then test the alternatives, line up the valuation reports, and plan how you will explain the price to employees and existing investors.

• Run both formulas: know who gains and who loses under a full ratchet and a weighted average, share by share.
• Ask for waivers: existing investors can agree to waive or soften anti-dilution rights to get the round done. That is a negotiation, not an entitlement.
• Compare a bridge: insiders may extend runway at the old price instead. Our guide to the bridge round in India covers the instruments.
• Order reports early: the FEMA certificate has a 90-day life, and the registered valuer and merchant banker reports serve different purposes.
• Fix the ESOPs: decide on repricing or new grants before staff read about the price elsewhere.

A company secretary, a lawyer and a chartered accountant should review the documents. This post explains the rules; it is not legal or tax advice for your round.

Questions

What is a down round in startup funding?

A down round is a funding round in which a startup issues shares at a lower price per share than in its previous round. Earlier investors and founders see the value of their holdings fall on paper, and anti-dilution clauses in earlier term sheets may give protected investors extra shares.

What is the difference between full ratchet and weighted average anti-dilution?

A full ratchet cuts an earlier investor's conversion price to the down round's price, however few shares are sold. A weighted average lowers it in proportion to how many new shares are issued at the lower price, so the investor gets fewer extra shares and founders lose less.

Can a foreign investor invest in a down round in India?

Yes. FEMA sets a floor, not a ceiling: an unlisted company cannot issue shares to a foreign investor below a fair value certified by a chartered accountant, a SEBI-registered merchant banker or a practising cost accountant, using a certificate no more than 90 days old. The company then files Form FC-GPR within 30 days.

What happens to ESOPs in a down round?

Options with an exercise price above the new share price are underwater and worth little on paper. A company can lower the exercise price of unexercised options by special resolution, provided the change is not prejudicial to option holders. Tax at exercise is based on fair market value less the price paid.

Sources: Outlook Business, Start-Ups Face Valuation Cuts While Chasing Fresh Capital (Tracxn data), 13 Jun 2025 · CXOToday, Tracxn 9M 2026 Report: India Tech Funding Rises 7% to $10.3B, 24 Sep 2026 · Reserve Bank of India, Master Direction: Foreign Investment in India, updated up to 15 Jun 2026 · Reserve Bank of India, FEMA (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, amended up to 13 Jun 2026 · Government of India (India Code), The Companies Act, 2013, sections 53 and 62 · ca2013.com, Rule 12, Companies (Share Capital and Debentures) Rules, 2014, checked 11 Nov 2026 · Ministry of Law and Justice, The Income-tax Act, 2025, Gazette of India, 21 Aug 2025 · CBDT, Income-tax Rules, 2026, rule 15 (taxheal.com reproduction), notified 20 Mar 2026

For more on how startup funding works in India, read the MyStartupValley blog or visit mystartupvalley.com.