The news continues to be bad for file-sharing startup BitTorrent, according to a report at TechCrunch, which claims the San Francisco company’s recent $17 million venture round has been substantially reduced.

In a letter reportedly sent to shareholders, BitTorrent chief executive Eric Klinker writes that the company raised its third round led by DAG Ventures in May and June of this year. But changes to the company’s business model and projections spurred DAG to demand that the round be renegotiated. Now the $17 million has been scaled back to $7 million, and BitTorrent’s pre-money valuation has been “substantially” reduced to $28 million.

There’s been plenty of talk about the challenges in raising funding and getting decent valuation in the current environment, but reducing an existing round is much more rare. It’s not clear how dire BitTorrent’s finances are, but this certainly doesn’t inspire much confidence in the startup’s future. After all, even Klinker says the company’s direction was the main cause of DAG’s doubts; he only mentions the economy further down.

Even prior to this story, there were other reasons to think BitTorrent was in trouble. Last month, the company laid off half its work force and Klinker, then the chief technology officer, took over as CEO. That followed an earlier round of layoffs in August. Even when news leaked out in September about the latest round, we had questions about the company’s business model and about whether the startup could expand beyond its core audience of game distributors.

DAG declined to comment on this story. Accel — another BitTorrent investor — hasn’t yet responded to our email.

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