A down round is an equity financing at a price per share below the price of the previous round. The comparison is per share, not headline valuation: a company can raise at a higher post-money and still price down if the share count grew through pools and conversions.
The direct mechanics are three. Anti-dilution provisions on existing preferred adjust conversion prices downward, shifting extra dilution onto common. New money buys more of the company per dollar, compounding that dilution. And options granted at the old fair value sit underwater, which is a retention problem precisely when retention is hardest.
The indirect mechanics often cost more. A down round resets the reference price every future negotiation anchors on, tests investor relationships (pay-to-play pressure, board renegotiations frequently ride along), and reads as a signal to employees, customers and the next fund unless the narrative is controlled: what was repriced, the market or the execution, and what the record shows.
The decision discipline is to compare the down round against its real alternatives (bridge, tranche, cost cuts extending runway to the milestone) on one axis: which path gets the company to its next value-creating proof at the least total dilution and the least damage to the people who must build it. Protecting a headline number is not on that axis.