What is a cram down and why are they used in distressed financings?
Short Answer
A cram down forces existing shareholders to accept new investment terms (often at a punitive valuation) to fund operations, used when a company is out of capital and has few alternatives.
Full Explanation
A cram down forces existing shareholders to accept new investment terms (often at a punitive valuation) to fund operations, used when a company is out of capital and has few alternatives.
Cram downs are highly coercive: existing investors and founders must accept new terms or the company runs out of cash and liquidates. Example: company has 3 months of runway; no Series B investors will commit; survival requires a 'cram down' financing at £3M valuation (vs Series A at £15M). Existing shareholders must either: 1) accept severe dilution, 2) sell down liquidation preferences to the new investor (converting to common), or 3) watch the company fail. Cram downs are relatively rare in professional VC because most companies either find alternative funding or shut down gracefully. When they occur, they're often triggered by failing to hit Series A metrics. Cram downs are controversial: they can be exploitative (a new investor effectively seizes control), but they also sometimes save companies. For founders, cram downs are existential: equity in a living company is worth more than equity in a dead one, so accepting cram down terms is often rational. The key protection: ensure that the new investor's terms don't grant them controlling interest and super-voting rights — you want them to have dilutive investment, not board control.
Related Glossary Terms
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Further Reading
What is a down round and how does it affect founders?
A down round is a funding event where the company's valuation is lower than the previous round, signalling market concerns and potentially triggering anti-dilution consequences for founders.
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