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Downside Protection
Strategies or clauses in a deal designed to protect the buyer or investor from losses if the acquired company underperforms or market conditions worsen.
Implications
Financial mechanisms or strategies used by investors or companies to limit potential losses in an investment, often including options like stop-loss orders, hedging, or contractual clauses that protect against significant declines in value.
Example
Example: A venture capital firm negotiates downside protection in the form of liquidation preferences, ensuring that it recoups its investment before other shareholders in the event of a company sale or liquidation.
Related Terms
Different from upside potential, which focuses on maximizing gains, downside protection is about minimizing losses in adverse scenarios.
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