Down rounds (or heavily structured "flat" rounds) are tough. Nobody likes them.
There can be times in a startup’s life where its performance and prospects are doing well but its ability to raise capital on terms that reflect performance is limited. It could be that the prior round was set at a high valuation. Or that growth has slowed and some time is needed to retool part of the business to get it to break through to renewed growth. The current investors may be tired or may see an opportunity to own more of the company and have a down round term sheet on the table.
These kinds of situations are difficult for any new investor to step into, be it an equity or a debt fund. A new investor will have to clearly understand the board dynamics and confirm that management and the board agree on the direction the company is heading. Nobody wants to invest into a company and learn at their next board meeting there is a split board with half wanting to replace the CEO, for example.
If the board and investors are supportive of management the company may benefit from taking on a venture loan. Take the case, mentioned above, where growth has slowed. A company in this situation taking on debt should have achieved some scale. When a company has some scale, a lender can get comfort that the enterprise value of the company is sufficient to cover the loan in spite of low growth.
A company faced with a down round may want to consider a venture loan. If it has the right profile the debt option can put off the equity raise until valuation starts heading in the right direction again.
These situations can be difficult. Be sure to be open with the new investor before agreeing to terms. Share the board presentations and have them speak with board members to get confirmation that everyone agrees on the company's direction.