The Coming Wave of Cram Downs

What do Good Eggs, a startup that delivers $4.99 broccoli bunches, and Tonal, a fitness startup that sells $3,995 exercise equipment, have in common—other than a business model subsidized by venture capital? They’re both engaged in a painful type of financing known as a “cram down.” 

If you grew up in the era of easy money, ultralow interest rates and 100 times multiples, it’s possible you’ve never heard about one of these deals, in which investors from previous rounds see their stakes dramatically reduced or wiped out entirely during a company’s desperate plea for cash. 

These deals, which represent a punishing response to efforts by some startups to survive, are becoming a fixture of dealmaking. But before investors hack together one of these structure-heavy financings, they should ask themselves whether the company is actually worth saving. Is it a fundamentally good company that happens to have fallen on hard times? Or is it a doomed enterprise?