A financing at a lower valuation triggers protective mechanics that reallocate ownership sharply.

Anti-dilution adjustment. Weighted average adjusts the conversion price partially, accounting for the size of the new issuance; full ratchet resets it to the new price regardless of size and is punitive to common holders.

Pay-to-play. Existing preferred holders who do not participate pro rata in the new round lose protections — converting to common, losing anti-dilution, losing protective provisions, or converting to a shadow series with reduced rights. This concentrates ownership among investors able to fund.

Recapitalizations. In severe cases, the capitalization table is reset with existing preferred converted to common, a new senior round issued, and a new option pool created. Common and early investors are substantially diluted.

Fiduciary exposure. Directors designated by investors participating in the round face conflicts. Process protections — an independent committee, a market check, an offer extended to all holders on the same terms, and a documented alternative analysis — are what defends the transaction.

Disclosure. Full information to all holders about the terms and the alternatives considered.

Modeling before agreeing. Founders and employees should model the post-round position, since the headline valuation says little about outcomes.