What Does Stuffed Down Indicate?
Stuffed down refers to an investor or creditor being stressed to easily settle for undesirable words. Stuffed down is principally used to give an explanation for each a dilutive problem capital (VC) financing round or the imposition of a bankruptcy reorganization plan by way of the court.
Key Takeaways
- Stuffed down principally refers to a dilutive problem capital (VC) financing round or the imposition of a bankruptcy reorganization plan by way of the court.
- When a VC financing round is crammed down, it means that the price of each share of a industry is underneath earlier prices, causing the percentage of the company owned by way of the earlier buyers to be lowered.
- These days, crammed down has turn into an off-the-cuff catch-all for any transaction that involves buyers being stressed into accepting destructive words.
Figuring out Stuffed Down
Historically, the period of time crammed down principally were given right here up in Chapter 13 bankruptcy filings, reflecting the debtor being given permission by way of the court to change the words of a contract and get started up a reorganization plan for an individual or company. In such cases, the quantity owed to creditors will also be diminished to replicate the honest market price (FMV) of collateral that was once used to secure the original debt.
Through the years, the period of time crammed down has turn into an off-the-cuff catch-all for any transaction that involves buyers being stressed into accepting destructive words. That would include selling an asset at a low price or a rights issue that threatens to dilute an investor’s ownership share in a company if they don’t wish to cough up further capital.
Stuffed down is especially again and again used inside the context of VC fundraising. When a VC financing round is crammed down, it means that the price of each share of a industry is underneath earlier prices, causing the percentage of the company owned by way of the earlier buyers to be lowered. Such provides are sometimes called “burn outs” or “wash outs.”
Types of Stuffed Down
Undertaking Financing
A crammed down financing in VC usually happens when firms are financed in multiple rounds. When startups are new and immature, their valuations tend to be very low and the entrepreneur or industry owner is now not all the time able to influence buyers to completely fund their concept or industry through a liquidity event.
It may be too early to know how so much funding is sought after. VCs like to withhold funding to further encourage founders and to make sure that operations are lean by way of rationing working capital.
If the earlier (not unusual) buyers of the company do not pony up new cash for the next round of financing, then their passion inside the company is “crammed down.” It is believed that initial buyers should go through a penalty if they do not contribute to subsequent financing rounds. The explanation proper right here is that they should now not completely be capable of enjoy the benefits of further funding being secured from other belongings shortly down the street.
This sort of cramming down moreover goals founders and other owner-managers for now not working the startup well enough to avoid such an movement. The process of offering additional shares in the marketplace at a cheaper price than had been purchased for inside the previous financing round is continuously known as a “down round.”
Bankruptcies
In a crammed down personal bankruptcy, a debtor will ask the court to change the words of their contract with a creditor, pleading that debt should be diminished in keeping with the FMV of the collateral securing that debt. The creditors will however care for collateral on the company as long as it offers reimbursement of the “secured portion” or honest market price of the collateral in their reimbursement plan.
In bankruptcies, crammed down plans are usually disliked by way of creditors. Most would rather liquidate any assets to get once more one of the money owed to them.
