Definition
A contractual mechanism that shields early investors from dilution when a startup raises money at a lower valuation than previous rounds. It's basically insurance against your company becoming less cool than you thought it was.
Example Usage
The Series A investors negotiated aggressive down round protection, which later decimated the founders' equity when the Series B came in at half the valuation.
Origin
Emerged in venture capital contracts during the dot-com bust as investors learned painful lessons about overvaluation
Fun Fact
Down round protection can trigger a "death spiral" where protecting early investors so heavily dilutes founders that they lose motivation to continue.
Source: National Venture Capital Association legal standards
Related Terms
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