Why would that leave "the public" holding the bag? The IPO itself is a down round, which means the public is buying at a lower and, by that view, more "correct"

Why would that leave "the public" holding the bag? The IPO itself is a down round, which means the public is buying at a lower and, by that view, more "correct" price. But the drop in value has already happened - the public isn't losing out unless there's a further price drop, which is not what is being talked about and won't necessarily happen. The ones losing out are, in some cases, the employees, and in some cases, the last stage investors. But the investors are usually investing in ways that more closely mimic debt than equity, and usually have ratchets to protect themselves.