Crammed Down

What Does Crammed Down Mean?

Crammed down alludes to a investor or creditor being forced to acknowledge undesirable terms. Crammed down is fundamentally used to portray either a dilutive venture capital (VC) financing round or the burden of a bankruptcy reorganization plan by the court.

Grasping Crammed Down

By and large, the term crammed down fundamentally came up in Chapter 13 bankruptcy filings, mirroring the debtor being given permission by the court to change the terms of a contract and start a reorganization plan for an individual or company. In such cases, the amount owed to creditors would be diminished to mirror the fair market value (FMV) of collateral that was utilized to secure the original debt.

Throughout the long term, the term crammed down has turned into an informal catch-for any transaction that includes investors being forced into tolerating unfavorable terms. That could incorporate selling an asset at a low price or a rights issue that threatens to dilute an investor's ownership share in a company assuming they won't hack up more capital.

Crammed down is particularly commonly utilized with regards to VC fundraising. At the point when a VC financing round is crammed down, it means that the price of each share of a business is below prior prices, causing the percentage of the company owned by the previous investors to be lowered. Such arrangements are likewise called "consume outs" or "wash outs."

Types of Crammed Down

Venture Financing

A crammed down financing in VC normally happens when companies are financed in different rounds. At the point when startups are new and juvenile, their valuations will generally be extremely low and the entrepreneur or business owner isn't generally able to persuade investors to completely fund their thought or business through a liquidity event.

It might likewise be too right on time to realize how much funding is required. VCs like to keep funding to additionally propel founders and to guarantee that tasks are lean by rationing operating capital.

In the event that the prior (common) investors of the company don't make good new cash for the next round of financing, then their interest in the company is "crammed down." It is accepted that initial investors should experience a penalty in the event that they don't add to subsequent financing rounds. The reasoning here is that they shouldn't completely have the option to partake in the benefits of more funding being secured from different sources later on down the line.

This form of packing down additionally targets founders and other owner-supervisors for not running the startup alright to stay away from such an action. The most common way of offering extra shares available to be purchased at a lower price than had been sold for in the previous financing round is otherwise called a "down round."

Insolvencies

In a crammed down personal bankruptcy, a debtor will ask the court to change the terms of their contract with a creditor, arguing that debt ought to be diminished in accordance with the FMV of the collateral getting that debt. The creditors will in any case keep up with collateral on the company as long as it offers repayment of the "secured piece" or fair market value of the collateral in their repayment plan.

In liquidations, crammed down plans are generally loathed by creditors. Most would prefer liquidate any assets to get back a portion of the money owed to them.

Features

• These days, crammed down has turned into an informal catch-for any transaction that includes investors being forced into tolerating unfavorable terms.
• At the point when a VC financing round is crammed down, it means that the price of each share of a business is below prior prices, causing the percentage of the company owned by the previous investors to be lowered.
• Crammed down for the most part alludes to a dilutive venture capital (VC) financing round or the inconvenience of a bankruptcy reorganization plan by the court.