Wash-Out Round
Candlefocus EditorIn a wash-out round, financial backers or investors buy out the existing shares in the company, either by purchasing them from individual shareholders or by valuating the company. This new money represents the new investors' stakes and erases previous ownership of the company. Depending on the specific arrangement, existing managers may be retained, although they may be removed or replaced.
A wash-out round is often resorted to when companies are in trouble and need some form of rescue funding. Such rounds are often used to prevent bankruptcies and closures of ailing firms and give them a chance to get back on their feet and become more successful.
These deals offer a lifeline to failing businesses, but they are a risky proposition. For investors, there is increased uncertainty, as existing data and information might not be completely reliable. Conversely, existing shareholders may be wary of taking on the risk associated with a new investor, even if it does not involve legislative or legal issues.
Wash-out rounds may also be used for purely strategic reasons. By using a wash-out round to clear out existing investors and bring in new weight, a firm can reboot itself, attract new talent, and refresh its corporate strategies and goals. A wash-out round also offers a company the chance to refocus its vision and aims, as well as taking the preparation it needs to move forward.
In summary, a wash-out round is a type of financing round where existing shareholders are effectively replaced with new investors. It is a useful, albeit risky, financing technique that can help a troubled business restructure and provide it with a fresh start. It can also spark a much-needed livening up of a particular venture, allowing for a refreshed focus and objectives that were previously out of reach.