Up Round - Explained
What is an Up Round?
If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
Table of ContentsWhat is an Up Round?What are the Characteristics of an Up Round?Academic Research on Up-round
What is an Up Round?
In every venture capital investment, round describes a type of funding used for the investment. A venture round describes a round of financing which is peculiar to every business. Some businesses or companies require more than a round of financing especially when they are in need of additional capital. The outcome of additional financial round that company engages in determines whether there will be upround or down round financing. Up Round is a type of financing whereby a company increase in worth when compared to its previous valuation. This occurs when investors buy stock form the company as a higher rate or valuation from the previous rate.
What are the Characteristics of an Up Round?
Usually, there is a difference between the valuation of initial or first round financing and additional rounds of financing. That is the valuation of a previous round of financing is often different forms the newly added round. The difference, whether an increase or decrease determines whether the firm will experience up round or down round financing. Many companies find setting a good paperwork for financing round as a daunting task, hence they demand the service of a professional, usually a corporate lawyer. The overwhelming demand of organising venture capital financial rounds can be done with through a network of expert corporate lawyers. The need for additional capital cause many companies do additional rounds of financing which are effective ways of generating venture capital. When an additional round of financing occur, the amount venture capital realised determines whether the round is up round or down round. When a company is able to raise higher capital from a financial round, it is called up round but inability to raise higher capital than those of previous financings, it is down round financing. Up rounds indicate increase in a companys wealth while down rounds reduce the position of a company on wealth ranking or equity position. Both up rounds and down rounds are ways of raising venture capital that have significant impacts on the company and their investors. While up rounds have high profit tendencies for investors, down rounds are seen to be harsh and bad news for many investors. Up rounds give companies a positive edge over others in terms of equity position while down rounds reduce the companys valuation as many investors often ask for additional assurances in these cases. Also, up rounds boosts the confidence of investors and the company while down rounds are associated with reduced confidence. Down rounds reduce the morale of both investors and employees because it make rebound and growth of the company difficult to attain. Down rounds occur when a private company offer additional shares for sale at a price lower than that of an earlier financing. Startups have been studied to have a high rate of down rounds financing, over-valuation is also noticeable in startups, especially startups in the tech industry. Many startups engage intensive publicity and extravagant promotion which help them realise massie first-round valuations, which will in turn cause over-valuations. In most cases, after over-valuations might have occurred as a result of hype in startups, the next round is often a down round. Although, many companies avoid down round, it might be the key to the success of some businesses, especially startups. Due to the challenges that companies experience in setting up the proper paperwork for any financing round, hiring experienced corporate lawyer becomes their next resort. The cost of hiring corporate lawyers vary from firm to firm. However, hiring a Priori corporate lawyer can cost a firm hourly rates starting from $185 per hour. The pricing of corporate lawyers hired through the Priori network is dependent on the experience of the lawyers. To have a full grasp of hoe Priori pricing works, companies can request a complimentary consultation which is often a free price quote.
Academic Research on Up-round
- Financing decisions as a source of conflict in venture boards, Forbes, D. P., Korsgaard, M. A., & Sapienza, H. J. (2010). Journal of Business Venturing, 25(6), 579-592.
- Early-stage entrepreneurial financing: A signaling perspective, Kim, J. H., & Wagman, L. (2016). Journal of Banking & Finance, 67, 12-22.
- The staging of venture capital financing: Milestone vs. Rounds, Talmor, E., & Cuny, C. J. (2005).
- Networks as the pipes and prisms of the market, Podolny, J. M. (2001). American journal of sociology, 107(1), 33-60.
- Do VCs use inside rounds to dilute founders? Some evidence from Silicon Valley, Broughman, B. J., & Fried, J. M. (2012). Journal of Corporate Finance, 18(5), 1104-1120.
- Covenants in venture capital contracts, Bengtsson, O. (2011). Management Science, 57(11), 1926-1943.
- Assessing technology needs for adaptation under the 'top-up'round, Fida, E. (2011). Perspectives and practical experiences, 45-57.
- Choosing ties from the inside of a prism: Egocentric uncertainty and status in venture capital markets, Podolny, J. M., & Castellucci, F. (1999). In Corporate social capital and liability (pp. 431-445). Springer, Boston, MA.
- The importance of geographical location and distance on venture capital contracts, Bengtsson, O., & Ravid, S. A. (2009).
- Private Equity, Routes, E. (2009).
- Staged Financing as a means to alleviate risk in VC/PE Financing, Sharma, J. K., & Tripathi, S. (2016). The Journal of Private Equity, 43-52.