The PE Data Center Buzz

1st Half 2008 Venture Capital Terms Report

Posted by Justin Byers, Lead Business Intelligence Analyst on October 23, 2008

This report is an analysis of the deal terms used in U.S. Venture Capital financings from Q1 2008 and Q2 2008 compared to Q1–Q4 2007. Data was collected from the Key Investment Trends database that includes closed venture financings from both the East and West Coasts. The questions appear in a format similar to that posed to the financing participants.

What round series is this financing?

The financings reviewed ran the gamut from Series A to Series G. The trend of rounds was close to being in line with previous quarters, with the only exception being Q1 2008 when the Series B round made up 41% of the deals as compared to previous quarter averages of approximately 30%.

If preferred stock, conventional convertible or participating preferred?

While the liquidation preference multiples were fairly low, roughly one-half of all deals included participation for the most senior series of preferred stock. This is a clear trendline indicating a shift of negotiating power to the company issuer and away from the investor groups.

In approximately 40% of the deals which provided participation rights, such participation was subject to some stated cap on returns, ranging anywhere from one to six times the original issue price.

Is the liquidation preference for the current round senior, pari passu, etc?

Most financings had a liquidation preference for the most recent round that was at least pari passuwith previous rounds. In another significant trendline difference from 2007, the senior liquidation preference decreased to a 40% average with the latest round senior to previous rounds.

What is the multiple of the liquidation preference in this financing?

Most financings in the first half of 2008 had a liquidation multiple of 1x, with the rare occurrence of a multiple greater than 1x. An example of a company with a liquidation multiple greater than 1x was RadioRX, Inc. which had a 2x liquidation multiple.

How would you characterize this round of financing?

Following the pattern of previous quarters, more than two-thirds of the rounds analyzed were up rounds.

Select the anti-dilution protection proposed in this deal: weighted average or full ratchet?

Full ratchet anti-dilution protection is still rarely used with less than 10% using this in 2008. One example of a company with a full ratchet anti-dilution protection is NeoTract, Inc. This company also had a post-money valuation of $40,466,305following an additional $8.4 MM to the Series A round.

Does this financing provide for redemption at the investor's option?

Mandatory or voluntary redemption was generally present in approximately 60% of the transactions in the first 3 quarters of 2007, but the trend has been on the decline since Q4 2007. There was significant regional variation.

If pay-to-play provisions were present, what were the penalties associated with the provision?

Close to 10% of deals included a pay-to-play provision. Such deals included those that forced conversion to common stock and those that forced conversion to a shadow preferred stock.

Were cumulative dividends present in this financing?

In another example of a power shift in the negotiation strength from the investors to the company issuer, the presence of cumulative dividends dropped slightly closer to an average of 20% of the transactions, although there was significant regional variation.

Did the financing involve a reorganization or recapitalization?

Some of the transactions we reviewed included a reorganization or recapitalization pursuant to which the outstanding capital stock of the company was significantly changed at the time of the financing.

The two types of reorganizations that we found were (1) reverse splits (aka combinations) and (2) forced conversion of senior securities into junior securities. Some transactions included both types.

Venture Cost-of-Capital Benchmark

The Venture Cost-of-Capital Benchmark is an analytics tool, defined in a graphical format whose independent variables are time, industry, and region. The value of such a tool lies in its capability to reduce a venture capital deal to a numerical value and then compare that numerical representation to a baseline.

The core of the benchmark involves careful, subjective evaluation of each data point commonly found on an amended Certificate of Incorporation or Term Sheet to establish a value for each of those terms. Thus a common stock deal with weighted average anti-dilution would carry a much lower number than a full-ratchet, series D, down round. The individual term values are based on internal research into subjective valuation and feedback from professionals in the industry.

Permalink  |  Send to Colleague  |  Comments  |