The big problem with a down round is existing investors generally have protection against their shares being diluted, so the non-prefered holders get completely hosed since their shares have to get diluted even more to make up for the fact that some shares won't get diluted at all.

Guess who the guys who gets hosed are? Founders and employees of the company who have options. Suddenly you and your co-workers have almost worthless shares in a company that isn't doing well. If you're at the start up for the potential upside it's at that point you really need to look at moving on. So suddenly a down-round isn't just a down-round it's also a "lose all the good employees" round.