Down rounds have become a hot topic in Australia’s startup scene as venture capital funding tightens and valuations reset in 2025. For founders, investors, and employees, understanding the mechanics and implications of a down round is now essential to navigating the current funding landscape.
What Is a Down Round—and Why Are They Back?
A down round occurs when a startup raises new capital at a lower valuation than its previous funding round. After a decade of sky-high valuations and abundant VC capital, 2025 has seen a clear shift. According to recent data from Cut Through Venture, nearly 30% of late-stage Australian startups that raised in 2024-2025 did so at reduced valuations, a significant jump from just 8% in 2022.
What’s driving this trend? Several factors have converged:
- Global Tech Correction: Public tech stocks have cooled, pulling private market valuations lower.
- VC Caution: Local and international investors are scrutinising business models and burn rates more closely.
- Interest Rate Environment: The RBA’s rate hikes through late 2024 have made capital more expensive and risk appetite lower.
- Reduced Exit Activity: Fewer IPOs and acquisitions have meant longer waits for liquidity, putting pressure on cash reserves.
This means many founders who raised at the peak of 2021-22 are now facing tough choices: accept a down round, cut costs, or risk running out of runway.
The Real-World Impact: Founders, Employees, and Investors
Down rounds can be emotionally and financially challenging, but they’re not the end of the road. Here’s how they affect key stakeholders:
For Founders
- Ownership Dilution: New shares are issued at a lower price, so founders may see their stake shrink substantially.
- Reputation Risk: There’s often a stigma, but many seasoned founders view a down round as a pragmatic way to survive tough markets.
- Resetting Expectations: Boards and teams may need to realign growth targets and strategy to match the new valuation.
For Employees
- Option Value: Staff holding options or ESOP shares may find their equity underwater if the new valuation is below their exercise price.
- Retention Issues: Startups often respond with option repricing or new grants to retain top talent.
For Investors
- Anti-dilution Protections: Early investors may have clauses (like full ratchet or weighted average) that shield them from dilution, sometimes at the expense of founders and employees.
- Follow-on Dilemmas: Deciding whether to invest more in a down round or accept dilution is now a common VC challenge.
Example: In early 2025, a Sydney SaaS startup raised a $10 million Series C at a $60 million valuation, down from $90 million in 2023. The founders saw their combined stake drop from 30% to 22%, but the business secured vital runway to reach profitability. Their board agreed on a partial ESOP refresh to keep key engineers motivated.
2025 Strategies for Surviving—and Thriving—After a Down Round
While a down round can sting, it can also be a springboard for a more resilient business. Here are practical strategies being used by Australian startups this year:
- Open Communication: Founders are advised to be transparent with teams and investors about the reasons for the down round and the path forward.
- Option Repricing: Many companies are repricing employee options or issuing new grants to restore incentive alignment.
- Operational Efficiency: 2025’s funding environment rewards leaner operations. Startups are cutting non-core expenses and focusing on cash flow.
- Creative Deal Terms: Some founders are negotiating milestone-based tranches, convertible notes, or investor warrants to reduce immediate dilution.
- Resetting Growth Targets: Boards are pushing for sustainable, profitable growth over rapid expansion at all costs.
Notably, the Australian government’s 2025 review of the Employee Share Schemes (ESS) tax regime is expected to provide more flexibility for option repricing, which could help startups retain talent after a down round.
Conclusion: The New Normal in Startup Fundraising
Down rounds are no longer rare events—they’re part of the new normal for many high-growth companies in Australia. While they bring challenges, they also provide an opportunity for founders and investors to reset, refocus, and build more durable businesses. With clear communication, thoughtful deal structuring, and a willingness to adapt, startups can not only weather the storm but come out stronger on the other side.
