VC & PE Glossary
What Is Washout Round?
Updated
Definition
A washout round is a severely down financing — often structured recap — where earlier shareholders' ownership and economic value are heavily diluted or wiped out by new money and preference resets.
Useful for: Founders, Investors
A washout round is financing that largely clears prior cap table economics — extreme dilution, preference resets, or debt-for-equity swaps that leave early holders with little.
How it works
Triggers include missed milestones, runway crisis, or broken unit economics when new investors will not fund at prior valuations. Structures:
- Flat or down priced round with heavy anti-dilution impact on converts
- Recap: new investors get senior preferred; old preferences converted or wiped
- Debt conversion: venture debt converts to equity senior to existing stacks
- Pay-to-play: prior investors must invest pro-rata or lose preferences and ownership
Example: company raised at $100M post-money; new money enters at $15M post with 2x liquidation preference for new series. Founders and old common may retain single-digit ownership unless they contribute fresh capital.
Board control often shifts to new lead. Option pools refresh — sometimes shrinking employee upside further.
Washouts differ from modest down rounds where prior holders retain meaningful stakes and preferences survive.
Why it matters
- Founders: Survival vs ownership — washouts keep the company alive but reset incentive alignment. Negotiate founder vesting refresh, carve-outs, and retention packages.
- Investors: Prior funds mark positions to zero or pennies; new investors bet on turnaround with protective terms.
Common mistake
Treating a labeled “Series C extension” as success when economics are washout-level — read the recap table, not the press release name.
Related ideas
See also liquidation preference, bridge round, and pay-to-play provisions.
Related terms
- Bridge Round — A bridge round is interim financing — usually convertible debt or an insider-led equity extension — raised between major priced rounds to extend runway until the company hits milestones or market conditions improve.
- Liquidation Preference — Liquidation preference is the right of preferred shareholders to receive a specified amount — often 1x their investment — before common shareholders receive proceeds in a sale, merger, or winding-up.
Common questions
Short answers for founders, LPs, and operators