Trends in Detailed Terms of Venture Financings : Q4′06

termsheetFenwick and West has an interesting survey of Silicon Valley venture financing for the fourth quarter of 2006.

I especially enjoy reading Fenwick’s survey because they include details about the “nitty gritty” of the terms. Having served as a counsel in many financing transactions, I can vouch for the fact that some of the details of the term-sheet turn out to be as important as the initial pricing of the equity purchase.

Specifically focusing on the terms of the VC financing:

(i) Senior liquidation preferences were used in about 40% of the financing. This is a good gauge of the confidence in the long term survivability of the companies. In Q1′05, the liquidation preference was included in 50% of the VC financing deals.

(ii) Antidilution Provisions - Weighted average anti-dilution provision was included in 95% of the deals. Only 1% of the deals did not include any antidilution provision and other 4% included ratchet-up antidilution provision.

(iii)Price Change – The direction of price changes for companies receiving financing this quarter, compared to their previous round, were: Up 67%, Flat 11% and Down 22%. (compare this to Q1′05, where price change in up direction was in 59%, flat in 10% and down in 31%; a clear improvement)

Some general observations include:

The amount invested by venture capitalists in the U.S. in 4Q06 was approximately $5.8 billion. Although this amount was approximately 15% less than the amounts invested in 3Q06 and 2Q06, it fell solidly within the $5-7 billion quarterly range seen since the end of 2003. Overall the amount invested by venture capitalists in the U.S. in 2006 was up approximately 8% over 2005.

2006 in general was the best acquisition year for venture backed companies since 2000, both in terms of aggregate amount paid ($31.2 billion) as well as median amount paid per transaction ($52 million).

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2 Responses to “Trends in Detailed Terms of Venture Financings : Q4′06”

  1. By Dube on Mar 1, 2022 | Reply

    Do these extra terms like antidilution or liquidated preferences, make a real difference? I don’t know of a deal that went sour because the parties could not agree on the liquidated preferences!

  2. By Sunny on Mar 1, 2022 | Reply

    Dube, liquidation preferences have a lot more impact then one might think. One specific example that I remember is where the founders put in $200k, angel investors put in $400k, round A had $1.5M (and also had liquidation preference). Company wasn’t moving fast enough and the assets were sold for $800k. Guess where did most of the 800k go? to the investors in round A. I got some money for the founders as past “salary”!

    There are the antidilution issues, and board seat issues and corporate restructuring issues; all of them end putting a strong constraints on what can the company do.

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