UK Trends and Developments Contributed by: Dylan Doran Kennett, Michael Jacobs, Stephen Newby and Mark Ife, Herbert Smith Freehills LLP
that a company could not attract outside third- party capital, but this perception has evolved. Internal rounds are now expected to continue in the short to medium term as early-stage inves - tors back their existing portfolio and take oppor - tunities for secondary sell-downs as part of the internal rounds. A similar feature is the continued growth in large- scale secondary sale processes, where existing shareholders can sell their stake to an investor, which also saw an uptick in 2024 for the same reasons. This trend is expected to continue into 2025, particularly for very successful compa - nies, as early investors look to crystallise some gains and to give employees and founders an opportunity to generate some liquidity given the extended hold period. In some cases, new and existing investors have also been able to capitalise on falling valuations and liquidity challenges by imposing investor- friendly terms during new funding rounds, as well as securing additional upsides (such as equity warrants or other forms of convertible instru - ments with de minimis subscription amounts). In some instances, funding rounds have consisted entirely of convertible instruments to avoid crys - tallising a formal valuation of the business in the hope of weathering the economic storm. “Down rounds” , where a company offers addi - tional shares for sale at a lower price than the previous financing round, hit a decade-high in 2024, as reported by Pitchbook. Down rounds often have the effect of existing shareholders being issued with additional shares in the com - pany under anti-dilution provisions to compen - sate their having invested at a higher valuation in a previous round. In 2024, nearly 25% and 18% of VC deals in the US and Europe, respec - tively, were down rounds. Looking forward, the
proportion of down rounds in total deal making is anticipated to decrease as valuations continue
to improve. Valuations
As the era of low interest rates appears to have come to an end, at least for the next cycle, the macroeconomic implications have affected the long-term valuations of many high-growth com - panies, alongside sectoral trends, such as the implications of generative AI on the business models of many Software as a Service (SaaS) businesses. Valuation, liquidation preferences and anti- dilution provisions are some of the most heavily negotiated commercial issues during a fund - raising, as they determine the percentage of the company that the investors will own as part of their investment and how these percentages can be affected in future down rounds, and affect how much money investors will receive on an exit. Founders are finding alternative ways to maintain trading momentum without undervalu - ing the company, such as the use of convertible instruments, thereby extending the company’s runway without having to revisit the valuation of a business. In response to this, investors have focused on how companies manage costs and their cash runways. That said, a company can only issue so many convertible loan notes before an equity round is forced to crystallise a new valuation. In March 2025, the Financial Conduct Author - ity (FCA) published its anticipated review of private market valuation practices. The FCA emphasised the importance of clear oversight, consistent valuation practices and timely revalu - ations, indicating that its forthcoming regulatory updates will aim to ensure fair pricing in UK pri - vate markets.
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