Wash-Out Round Law and Legal Definition

Wash-out round is a common and unpleasant round of financing to owners of small companies who are financially unstable. In a wash out round, the previous investors, founders, and management dilute drastically. When such financing is done, new investors gain majority ownership and control of the company, and the previous investors and owners walk away with a much smaller ownership position. It is also known as "burn-out round" or "cram-down round".

The wash-out round is often the final financing opportunity available to entrepreneurs before a company is forced into bankruptcy. A wash-out round helps new investors to take control of the company because previous owners are in desperate need of more financing in order to avoid bankruptcy. They compromise with a smaller level of ownership. Wash-outs were seen during the dotcom craze of the late 1990s when many companies were significantly overvalued.