A down round happens when a company raises new money at a lower valuation than it previously achieved, and it’s one of the more unsettling trigger events for equity holders, since it can instantly turn options that once looked valuable into options that are worth nothing on paper. This post covers what actually happens to your options, why it happens automatically, and what companies typically do about it.
What actually happens to my options in a down round?
Once the down round closes, the company typically commissions a new 409A valuation reflecting the lower price, since a new funding round is a material event that requires an updated valuation regardless of direction. If your strike price was set based on the company’s prior, higher valuation, and the new FMV comes in below that strike price, your options become underwater immediately, meaning there’s currently no financial reason to exercise them.
Why does this happen automatically?
Because a down round is direct evidence of the company’s current value, and 409A valuations are required to reflect the most recent, best available information. A valuation from before the down round becomes unusable the moment the new round closes, and the new valuation has to account for the lower price investors just paid, which typically pulls common stock value down as well.
Does this affect options I’ve already vested and exercised?
If you’ve already exercised and hold actual shares, a down round affects the value of what you own, but doesn’t create a new tax event or take the shares away. It’s unvested and unexercised options that are directly affected by becoming underwater, since their value depends entirely on the gap between your fixed strike price and the now-lower FMV.
What do companies typically do about underwater options?
There’s no single required response, but a few common approaches show up repeatedly: repricing existing options down to match the new, lower valuation (which usually requires board approval and sometimes shareholder approval); offering an exchange program where employees trade in underwater options for new ones at the current lower price; issuing additional refresh grants on top of existing underwater ones; or simply maintaining the status quo and waiting to see if the valuation recovers in a future round. Each of these decisions is the company’s to make, not something you can request unilaterally.
Does a down round change my vesting schedule?
No. Your vesting schedule is independent of the company’s valuation. A down round doesn’t accelerate, slow down, or otherwise change how much of your grant vests or when, it only affects what that vested (or unvested) equity is currently worth.
What about new hires after the down round?
New employees granted options after the down round will have their strike price set against the new, lower 409A valuation, meaning they’ll likely have a lower strike price than employees who joined before the down round. This can create a noticeable gap between what longer-tenured employees and newer hires are paying to exercise, even for the exact same type of grant.
Worked example
Say you were granted 20,000 options at a $5 strike price, based on the company’s Series B 409A valuation. The company then raises a Series C down round, and the resulting new 409A valuation comes in at $2 a share.
Your strike price stays at $5, since that’s fixed to your original grant. Your options are now underwater by $3 a share, meaning exercising at $5 to buy shares currently valued at $2 wouldn’t make financial sense. If the company later offers a repricing or exchange program, your options might be adjusted down toward the new $2 valuation, but that depends entirely on what the company chooses to do, not something that happens automatically.
FAQ
Are my options worthless if my company has a down round? Not necessarily worthless long-term, but likely underwater at the current valuation, meaning there’s no immediate financial reason to exercise. If the company’s value recovers in a future round, the options could become in-the-money again.
Will my company automatically reprice my underwater options? No. Repricing requires a specific company decision and often board or shareholder approval. Some companies do this after a down round, others don’t.
Does a down round affect my vesting schedule? No. Vesting continues on its original schedule regardless of changes in valuation.
Should I exercise underwater options? There’s rarely a financial reason to exercise options priced above the current fair market value, since you’d be paying more than the shares are currently considered worth. Whether that changes depends on your own view of the company’s future prospects.
Do new hires get a lower strike price after a down round? Yes, typically. New grants after a down round are priced against the new, lower 409A valuation, which can create a real gap between what different cohorts of employees pay to exercise similar grants.
What to do next
Whether and how your company addresses underwater options after a down round is a company-specific decision you’ll likely hear about directly from HR or your equity plan administrator, not something governed by a universal rule. You can model your own numbers at movewealth.io.
MoveWealth is not a broker-dealer, investment adviser, or lender. This is educational content, not financial, tax, or legal advice. Consult a qualified professional about your specific situation.