Three related, but distinct, events
A down round raises new capital at a lower valuation than the company's prior round, immediately diluting every existing holder more heavily than a normal up round would. A bridge is short-term financing, often a small convertible note or SAFE, meant to extend runway until either a real priced round or an acquisition, and frequently signals the company is in a weaker negotiating position than its last raise implied. A recapitalization (recap) is a more aggressive restructuring of the cap table, sometimes wiping out or heavily diluting earlier investors and employees to give new capital enough ownership to justify the risk of keeping the company alive.
| Event | Effect on an angel's existing ownership |
|---|---|
| Down round | Meaningful dilution beyond a normal round; existing shares are now worth less per share too |
| Bridge (no recap) | Some dilution, typically modest if the bridge is small relative to prior rounds |
| Recap | Can be severe: common stock (including most angel positions) is sometimes wiped out or reduced to a token amount to make room for new investors |
Worked example: ownership before and after a recap
A company that raised at a $15m valuation two years ago is now nearly out of cash, with no acquirer and no investor willing to fund a normal round. New investors agree to fund a recap, but only if existing common stockholders (including most early angels) are diluted down to a combined 5% of the company, in exchange for the company surviving at all.
What an angel can actually do about it
Realistically, very little once a recap is on the table, a small-check angel rarely has the leverage (Lesson 18) to negotiate its terms. The more useful lens is upstream: treating a bridge round, or a founder going unusually quiet between updates, as an early warning sign worth investigating before a recap becomes the only option, rather than being surprised when the cap table arrives already restructured.
Checkpoint
- Down round, bridge, and recap are related but distinct: increasing severity of dilution, with a recap sometimes wiping out most of an angel's existing position.
- A small-check angel rarely has leverage to negotiate recap terms once they're on the table.
- A bridge round or an unusually quiet founder is an early warning sign worth investigating before a recap becomes the only path forward.
If anything here still feels unclear, ask before moving to Lesson 28.