VC Deal Lawyer

Much thanks to Cooley Godward Kronish LLP and Fenwick & West LLP for their recent reports on Q2 2009 venture financing term trends.  This is a long post, but full of info helpful to people in the venture deal space.

My summary:  The typical round in Q2 2009, irrespective of series, was most likely a down or flat round (Fenwick study would say most likely a down or up round), most likely had a 1x liquidation preference with uncapped participating preferred stock, most likely had weighted average anti-dilution, most likely had drag along rights but no pay-to-play provision.

The following are some of the stats pulled from the reports.  All references to quarters are for 2009:

Fenwick & West Report

The report from F&W (which can be found here) analyzed venture financing rounds for 89 companies headquarterd in Silicon Valley and that raised money in Q2. 

Financing Rounds.   Of the rounds closed in Q2, 8% were Series A, 27% were Series B, 35% were Series C, 13% were Series D and 17% were Series E or higher, compared to 13%, 28%, 17%, 20% and 22%, respectively, in Q1.

Valuations.  In Q2, 46% of deals were down rounds, 22% were flat and 32% were up rounds, compared to 46%, 29% and 25% in Q1, respectively.  Some of the flat rounds clearly moved to up rounds.

The down rounds, broken down by series, were as follows:  Series B (16%), Series C (51%), Series D (67%) and Series E or higher (67%).  Q1 looked like the following:  Series B (38%), Series C (50%), Series D (39%) and Series E or higher (60%).

Liquidation Preference.  Forty-one percent (41%) of deals in Q2 had senior liquidation preferences, compared to 45% in Q1.  They were broken down as follows:  Series B (17%), Series C (52%), Series D (50%) and Series E or higher (53%).  Q1 looked like the following:  Series B (35%), Series C (38%), Series D (56%) and Series E or higher (55%).

Twenty-four percent (24%) of deals in Q2 had multiple liquidation preferences (i.e., more than 1x), compared to 28% in Q1.  The greater majority in Q2 had multiples between 1x and 2x (75%) where as 25% had multiples between 2x and 3x.  None had multiples in excess of 3x.  The use of multiples in Q1 was more spread out:  1x – 2x (80%), 2x – 3x (10%) and more than 3x (10%).

Forty-nine percent (49%) of the liquidation preferences in Q2 were participating preferred, compared to 51% in Q1.  Sixty-seven percent (67%) of the participating preferred rounds in Q2 were not capped, compared to 60% in Q1.

Cumulative Dividends.  Two percent (2%) of rounds in Q2 had cumulative dividends, compared to 10% in Q1.

Antidilution.  The greater majority (97%) of rounds in Q2 had weighted average antidilution protection, with 3% having full ratchet.  The Q1 numbers were identical.

Pay-to-play.  Fifteen percent (15%) of rounds in Q2 had pay-to-play provisions, compared to 14% in Q1.  Of all the play-to-play provisions in Q2, 100% converted into common stock if they did not participate in the follow on rounds, compared to 73% in Q1.

Redemption.  Twenty percent (20%) of the rounds in Q2 had redemption rights, compared to 24% in Q1.

Cooley Report

The report from Cooley (which can be found here) analyzed venture financing rounds for 75 companies that raised money in Q2.

Valuations.  The following were the median per share valuations for Q2:  Series A – $4.40, Series B – $17.10, Series C – $33.00 and Series D or higher – $73.00, compared to $3.38, $13.24, $26.70 and $30.00, respectively, in Q1.

Of the rounds closed in Q2, 25% were up rounds, compared to 12% in Q1 and 56% were down or flat, compared to 66% in Q1.

Liquidation Preference. 

Series A.  In Q2, 90% of the rounds had a 1x or less preference, 5% had 1x to 2x preference and 5% had 2x to 3x preference, compared to 100% of the rounds in Q1 being a 1x preference.

Series B.  In Q2, 82.1% of the rounds had a 1x or less preference, 14.3% had 1x to 2x preference and 3.6% had 2x to 3x preference.  Whereas in Q1, 77.3% of the rounds had a 1x or less preference, 9.1% had 1x to 2x preference, 4.5% had 2x to 3x preference, 4.5% had more than a 3x preference and 4.5% had no preference.

Series C.  In Q2, 71.4% of the rounds had a 1x or less preference, 21.4% had 1x to 2x preference and 7.1% had 2x to 3x preference.  Whereas in Q1, 42.9% of the rounds had a 1x or less preference, 42.9% had 1x to 2x preference and 14.3% had 2x to 3x preference.

Series D.  In Q2, 80% of the rounds had a 1x or less preference, 10% had 1x to 2x preference and 10% had 2x to 3x preference.  Whereas in Q1, 61.5% of the rounds had a 1x or less preference and 38.5% had 1x to 2x preference.

Participating Preferred.  In Q2, 60% of the rounds had participating preferred stock, compared to 61% in Q1.

Series A.  In Q2, 66.7 % of the participating preferred rounds had no cap, 13.3% had a 2x cap, 13.3% had a 3x cap and 6.7% had a cap greater than 3x.  Whereas in Q1, 64.3% of the participating preferred rounds had no cap, 7.1% had a 2x cap and 28.6% had a 3x cap.

Series B.  In Q2, 61.5% of the participating preferred rounds had no cap, 7.7% had a 2x cap, 15.4% had a 3x cap and 15.4% had a cap greater than 3x.  Whereas in Q1, 57.1% of the participating preferred rounds had no cap, 14.3% had a 2x cap and 28.6% had a 3x cap.

Series C.  In Q2, 75% of the participating preferred rounds had no cap, none had a 2x cap, 12.5% had a 3x cap and 12.5% had a cap greater than 3x.  Whereas in Q1, 80% of the participating preferred rounds had no cap, none had a 2x cap and 20% had a 2x cap.

Series D.  In Q2, 62.5% of the participating preferred rounds had no cap, 25% had a 2x cap and 12.5% had a 3x cap.  Whereas in Q1, 60% of the participating preferred rounds had no cap, 10% had a 2x cap, 10% had a 3x cap and 20% had a cap greather than 3x.

Pay-to-Play.  Thirteen percent (13%) of rounds in Q2 had pay-to-play provisions, compared to 26% in Q1.  Five percent (5%) of Series A rounds had pay-to-play, 14.3% of Series B rounds, 21.4% of Series C rounds and 10% of Series D or higher rounds.  In Q1, the breakdown was 13.6% of Series A rounds, 31.8% of Series B rounds, 21.4% of Series C rounds and 38.5% of Series D or higher rounds.

Drag Along Rights.  Sixty-seven percent (67%) of rounds in Q2 had drag along rights.  Sixty percent (60%) of Series A rounds had drag along rights, 86% of Series B rounds, 43% of Series C rounds and 50% of Series D or higher rounds.  In Q1, the breakdown was 50% of Series A rounds, 64% of Series B rounds, 71% of Series C rounds and 46% of Series D or higher rounds.

Antidilution.  In Q2, the vast majority of deals utilized broad-based weighted average antidilution provisions.  Stripping away broad-based provisions, here’s what the universe looks like:  50% of all rounds had full ratchet, 21% had narrow based weighted average and 29% had no antidilution.