A convertible is a bet you don't have to settle until later. A SAFE, a convertible loan note or an advance subscription agreement lets you put money in now and fixes the price at the next priced round, usually with a valuation cap or a discount in your favour. In a rising market that deferral works out: the round prices high, your cap kicks in, and your early cheque converts cheaply. A down round is where the same deferral shows its other side.
This piece is the down-round case for early money holding a convertible: how it converts when the priced round comes in low, what that does to the cap table, and the one UK point that only bites in the down case. For the instruments themselves, our SAFE versus convertible note explainer covers the definitions; this page assumes them.
A cap protects you on the way up. It does nothing for you on the way down.
What is a down round, and why does it matter to a convertible holder?
A down round is a priced funding round set at a lower share price than the company's previous round. For an ordinary shareholder that means a paper mark-down and, often, anti-dilution adjustments above them. For someone holding a convertible it means something more specific: the round that finally sets your price is coming in low, and the cap you negotiated to protect the upside may no longer do anything.
The reason it matters is that a convertible has no price of its own. A SAFE, note or ASA sits unpriced until a qualifying priced round triggers conversion. Your cap and discount tell you how your money converts relative to that round, and when the round is a down round, those terms decide whether your early cheque still lands ahead of the new money or merely alongside it. The up-round version of this, where the cap does the heavy lifting, is set out in our up-round companion; the down case runs the other way.
How does a SAFE or note convert when the priced round is below the cap?
It converts at the better of the two terms for you: the valuation cap or the discount, whichever gives you the lower price per share. In a down round the cap is usually irrelevant, because the round has priced below it, so the discount does the work instead.
Take the illustrative numbers in the table above (invented, to show the shape). You put £100,000 into a SAFE with a £5m cap and a 20% discount. The company then raises a priced round at a £4m pre-money valuation, a genuine down round against the hopes baked into your cap. The cap of £5m is now above the round price, so it does nothing: you would never choose to convert at a higher valuation than the new investors are paying. The discount still helps, though. Twenty per cent off the £4m round values your conversion at £3.2m. You convert cheaper than the new money, but at a fraction of the valuation you were underwriting when you signed.
The lesson is that a cap is a ceiling, never a floor. It caps how high the price you convert at can go; it puts no floor under how far the company's value can fall. Early money on a convertible carries the full down-round risk on the shares it eventually receives, softened only by the discount and whatever cap survives.
Does a down round trigger anti-dilution?
Yes, for the priced shareholders who hold anti-dilution rights. A down round is precisely the event those clauses are written for: when new shares are issued below what an earlier priced investor paid, their conversion price is adjusted downward, so they end up with more shares to compensate. That re-cuts the cap table, and the extra shares come out of the founders and any holders without protection.
Two things follow for a convertible holder. First, most convertibles don't carry a separate ratchet of their own; a SAFE or ASA converts on its cap or discount, and that conversion is its adjustment. Second, you are usually converting into the same round that is firing everyone else's anti-dilution, so the enlarged, re-cut cap table is the one your new shares land on. The mechanics of the adjustment itself, full ratchet versus the more common broad-based weighted average, are set out in our anti-dilution explainer. In a British seed or Series A, weighted average is the norm and full ratchet is rare and treated as aggressive.
Can I lose my SEIS/EIS relief in a down round?
The relief risk sits with the instrument, not the valuation, and it is mainly an ASA question. A properly structured advance subscription agreement can qualify for SEIS or EIS; a SAFE or a convertible loan note generally cannot, because HMRC requires shares to be subscribed for cash and not issued on the conversion of a debt. A down round doesn't change that starting position, but it can stress the conditions an ASA has to meet.
HMRC's rules for a qualifying ASA are strict. In its venture capital schemes manual (VCM12025), HMRC states that the agreement must not permit the subscription payment to be refunded under any circumstances, must bear no interest, cannot be varied, cancelled or assigned, and must carry a longstop date by which the shares must be issued. HMRC expects that longstop to be no more than six months from the date of the ASA. A down round is exactly the moment when a company under pressure might want to renegotiate, delay past the longstop, or offer some form of refund or protection. Any of those can break the qualifying character of the ASA, and with it the route to relief. The GOV.UK venture-scheme guidance sets out the wider conditions, and none of this substitutes for confirming your own position with HMRC or an adviser.
Separately, if you already hold qualifying SEIS or EIS shares from an earlier priced cheque, a down round on the company is a valuation event, not a disposal, so it doesn't by itself trigger a clawback of relief already given. The clawback risks are the familiar ones: selling inside three years, or receiving value. A down round is neither.
What can an angel actually do about a down-round conversion?
Less than the paperwork suggests, and that is the honest answer. Once a convertible is signed, its cap, discount and conversion trigger are fixed; a down round runs those terms mechanically, and a minority early-money holder rarely has a lever to change them. What an angel does have is a set of things to understand before signing, and a set of factors to weigh when a down round arrives.
Before signing, the terms that decide your down-round outcome are the cap, the discount, whether there's a floor of any kind (uncommon), the conversion trigger, and, for a UK ASA, whether the non-refundable longstop structure holds up. In the round itself, the questions are the ones every holder faces: whether to participate in the new money, how the re-cut cap table leaves you, and what the tax treatment of your specific instrument actually is. None of that is a decision this page can make. Whether a given conversion, follow-on or hold makes sense turns on your portfolio, your reserves, your read of the company and your own tax position, and the rules shift at Budgets. This is general information, not financial advice: confirm any tax point in the GOV.UK guidance and take FCA-regulated advice before acting.
Frequently asked questions
What happens to a SAFE in a down round?
It converts at the better of its valuation cap or its discount for you, whichever gives the lower price per share. In a down round the priced round is usually below your cap, so the cap does nothing and the discount does the work. You still convert cheaper than the new investors, but at a lower valuation than the one you were underwriting when you signed. A cap protects your upside; it puts no floor under how far the company's value can fall.
Does a down round trigger anti-dilution?
Yes, for priced shareholders who hold anti-dilution rights. A down round issues new shares below what an earlier investor paid, so their conversion price is adjusted down and they receive more shares to compensate, which re-cuts the cap table at the expense of founders and unprotected holders. Most convertibles don't carry a separate ratchet: a SAFE or ASA converts on its own cap or discount, and that conversion is its adjustment. In UK seed and Series A rounds, broad-based weighted average is the norm and full ratchet is rare.
Can I lose my SEIS/EIS relief in a down round?
A down round is a valuation event, not a disposal, so it doesn't by itself claw back relief already given on qualifying shares. The risk is instrument-specific and mainly concerns ASAs. HMRC (VCM12025) requires a qualifying advance subscription agreement to be non-refundable under any circumstances, interest-free, non-assignable, not variable or cancellable, and to carry a longstop of usually no more than six months. A down round is exactly when a stressed company might delay past the longstop or offer a refund, either of which can break the qualifying character. SAFEs and convertible loan notes generally sit outside SEIS/EIS regardless. Confirm your position at GOV.UK.
Is a valuation cap good in a down round?
A cap is a ceiling, not a floor, so in a genuine down round it often stops mattering. The cap limits how high the valuation you convert at can go; it gives you no protection when the priced round comes in below the cap. In that case your discount, if you have one, is what still works in your favour. A cap is worth most in an up-round, which is the opposite scenario. Read the down case and the up case together before assuming a cap protects you either way.
Should I convert, follow on or hold in a down round?
That is a decision this article cannot make for you. A convertible's cap, discount and conversion trigger are fixed once signed, and a down round runs them mechanically; what you weigh is whether to participate in the new money, how the re-cut cap table leaves you, and the tax treatment of your specific instrument. It depends on your reserves, your portfolio concentration, your read of the company and your tax position. This is general information, not financial advice. Confirm the current rules at GOV.UK and take FCA-regulated advice before committing capital.