Background - Fenwick & West LLP analyzed the terms of venture financings for 126 companies headquartered in Silicon Valley that reported raising money in the second quarter of 2010.
Third party analysis of the venture industry in the second quarter of 2010 reported a significant increase in venture investment, mild improvement in venture funded company liquidity, and continued difficulty in capital-raising by venture funds. Detailed results are as follows:
The financings broke down according to the following rounds:
| Series | Q2'10 | Q1'10 | Q4'09 | Q3'09 | Q2'09 | Q1'09 | Q4'08 | Q3'08 |
| A | 18% | 24% | 23% | 17% | 8% | 13% | 16% | 16% |
| B | 22% | 21% | 22% | 31% | 27% | 28% | 26% | 26% |
| C | 28% | 30% | 21% | 19% | 35% | 17% | 29% | 28% |
| D | 20% | 11% | 17% | 16% | 13% | 20% | 14% | 17% |
| E and higher | 12% | 14% | 17% | 17% | 17% | 22% | 15% | 13% |
The direction of price changes for companies receiving financing this quarter, compared to their previous round, were as follows:
| Price Change | Q2'10 | Q1'10 | Q4'09 | Q3'09 | Q2'09 | Q1'09 | Q4'08 | Q3'08 |
| Down | 27% | 32% | 30% | 36% | 46% | 46% | 33% | 12% |
| Flat | 18% | 19% | 23% | 23% | 22% | 29% | 13% | 15% |
| Up | 55% | 49% | 47% | 41% | 32% | 25% | 54% | 73% |
The percentage of down rounds by series were as follows:
| Series | Q2'10 | Q1'10 | Q4'09 | Q3'09 | Q2'09 | Q1'09 | Q4'08 | Q3'08 |
| B | 14% | 23% | 24% | 19% | 16% | 38% | 21% | 7% |
| C | 29% | 45% | 25% | 45% | 51% | 50% | 43% | 14% |
| D | 36% | 18% | 47% | 56% | 67% | 39% | 22% | 12% |
| E and higher | 33% | 27% | 26% | 39% | 67% | 60% | 45% | 15% |
Set forth below is (i) for up rounds, the average per share percentage increase over the previous round, (ii) for down rounds, the average per share percentage decrease over the previous round, and (iii) the overall average per share percentage change from the previous round for all rounds taken together. Such information is broken down by series for 2Q10 and is provided on an aggregate basis for comparison purposes for the prior four quarters. In calculating the "net result" for all rounds, "flat rounds" are included. For purposes of these calculations, all financings are considered equal, and accordingly the results are not weighted for the amount raised in a financing.
| Percent Change | Series B | Series C | Series D | Series E and higher | Combined total for all Series for Q2'10 | Combined total for all Series for Q1'10 | Combined total for all Series for Q4'09 | Combined total for all Series for Q3'09 | Combined total for all Series for Q2'09 |
| Up rounds | +118% | +78% | +51% | +87% | +86% | +78% | +73% | +77% | +61% |
| Down rounds | -64% | -64% | -69% | -60% | -65% | -54% | -50% | -57% | -54% |
| Net result | +67% | +29% | Flat | +15% | +30% | +21% | +19% | +11% | -6% |
The table below sets forth the direction of price changes and Barometer results for companies receiving financing in 2Q10, compared to their previous round, by industry group. Companies receiving Series A financings are excluded as they have no previous rounds to compare.
| Industry | Number of Financings | Up Rounds | Down Rounds | Flat Rounds | Barometer |
| Software | 34 | 73% | 21% | 6% | +51% |
| Hardware | 14 | 29% | 36% | 35% | -7% |
| Lifescience | 23 | 48% | 22% | 30% | +4% |
| Internet/Digital Media | 23 | 52% | 35% | 13% | +43% |
| Cleantech | 7 | 57% | 29% | 14% | +59% |
| Other | 2 | 50% | 50% | 0% | -18% |
| Total - All Industries | 103 | 55% | 27% | 18% | +30% |
Please note that some industries have small sample sizes that reduce the statistical validity of the results.
Senior liquidation preferences were used in the following percentages of financings:
| Q2'10 | Q1'10 | Q4'09 | Q3'09 | Q2'09 | Q1'09 | Q4'08 | Q3'08 |
| 40% | 38% | 41% | 49% | 41% | 45% | 41% | 45% |
The percentage of senior liquidation preference by series was as follows:
| Series | Q2'10 | Q1'10 | Q4'09 | Q3'09 | Q2'09 | Q1'09 | Q4'08 | Q3'08 |
| B | 32% | 23% | 24% | 38% | 17% | 35% | 30% | 35% |
| C | 34% | 42% | 50% | 40% | 52% | 38% | 35% | 48% |
| D | 48% | 36% | 58% | 63% | 50% | 56% | 61% | 59% |
| E and higher | 53% | 53% | 37% | 67% | 53% | 55% | 50% | 38% |
The percentage of senior liquidation preferences that were multiple preferences were as follows:
| Q2'10 | Q1'10 | Q4'09 | Q3'09 | Q2'09 | Q1'09 | Q4'08 | Q3'08 |
| 17% | 23% | 19% | 21% | 24% | 28% | 23% | 16% |
Of the senior liquidation preferences that included a multiple preference, the ranges of the multiples broke down as follows:
| Range of multiples | Q2'10 | Q1'10 | Q4'09 | Q3'09 | Q2'09 | Q1'09 | Q4'08 | Q3'08 |
| >1x - 2x | 71% | 86% | 57% | 89% | 75% | 80% | 70% | 50% |
| >2x - 3x | 29% | 14% | 43% | 11% | 25% | 10% | 20% | 50% |
| >3x | 0% | 0% | 0% | 0% | 0% | 10% | 10% | 0% |
The percentages of financings that provided for participation were as follows:
| Q2'10 | Q1'10 | Q4'09 | Q3'09 | Q2'09 | Q1'09 | Q4'08 | Q3'08 |
| 35% | 48% | 51% | 53% | 49% | 51% | 57% | 62% |
Of the financings that had participation, the percentages that were not capped were as follows:
| Q2'10 | Q1'10 | Q4'09 | Q3'09 | Q2'09 | Q1'09 | Q4'08 | Q3'08 |
| 61% | 54% | 54% | 60% | 67% | 60% | 51% | 51% |
The decrease in use of participating liquidation preference was due to a significant decrease in the use of that provision in Series A rounds this quarter.
Cumulative dividends were provided for in the following percentages of financings:
| Q2'10 | Q1'10 | Q4'09 | Q3'09 | Q2'09 | Q1'09 | Q4'08 | Q3'08 |
| 7% | 7% | 4% | 7% | 2% | 10% | 4% | 4% |
The uses of antidilution provisions in the financings were as follows:
| Type of Provision | Q2'10 | Q1'10 | Q4'09 | Q3'09 | Q2'09 | Q1'09 | Q4'08 | Q3'08 |
| Ratchet | 4% | 5% | 6% | 3% | 3% | 3% | 2% | 7% |
| Weighted Average | 94% | 94% | 94% | 96% | 97% | 97% | 98% | 93% |
| None | 2% | 1% | 0% | 1% | 0% | 0% | 0% | 0% |
The use of pay-to-play provisions in the financings was as follows:
Percentages of financings having pay-to-play provisions.
| Q2'10 | Q1'10 | Q4'09 | Q3'09 | Q2'09 | Q1'09 | Q4'08 | Q3'08 |
| 16% | 7% | 10% | 15% | 15% | 14% | 15% | 12% |
Note that anecdotal evidence indicates that companies are increasingly using contractual "pull up" provisions instead of charter based "pay to play" provisions. These two types of provisions have similar economic effect but are implemented differently. The above information includes some, but likely not all, pull up provisions, and accordingly may understate the use of these provisions.
The pay-to-play provisions provided for conversion of non-participating investors' preferred stock into common stock or shadow preferred stock, in the percentages set forth below:
-- Common Stock
| Q2'10 | Q1'10 | Q4'09 | Q3'09 | Q2'09 | Q1'09 | Q4'08 | Q3'08 |
| 100% | 86% | 80% | 93% | 100% | 73% | 85% | 60% |
-- Shadow Preferred Stock
| Q2'10 | Q1'10 | Q4'09 | Q3'09 | Q2'09 | Q1'09 | Q4'08 | Q3'08 |
| 0% | 14% | 20% | 7% | 0% | 27% | 15% | 40% |
The percentages of financings providing for mandatory redemption or redemption at the option of the venture capitalist were as follows:
| Q2'10 | Q1'10 | Q4'09 | Q3'09 | Q2'09 | Q1'09 | Q4'08 | Q3'08 |
| 23% | 24% | 21% | 19% | 20% | 24% | 20% | 23% |
The percentages of post-Series A financings involving a corporate reorganization were as follows:
| Q2'10 | Q1'10 | Q4'09 | Q3'09 | Q2'09 | Q1'09 | Q4'08 | Q3'08 |
| 8% | 14% | 5% | 8% | 10% | 10% | 13% | 4% |
Barry J. Kramer, Partner, Corporate Group
Mr. Kramer represents a wide range of technology and life science companies, from privately held start-ups to publicly traded companies, as well as prominent venture capital funds. Mr. Kramer has spoken numerous times on various business and legal topics, including teaching an accredited course at UCSF entitled "A Scientist's Guide to Intellectual Property" and speaking at various PLI programs related to venture investing. He is the author of a quarterly venture capital survey, as well as a firm brochure on technology licensing. Mr. Kramer is licensed as a Certified Public Accountant in the State of Maryland. His emphasis is on: Start-Up Issues, Venture Capital Financings, Mergers and Acquisitions, Initial Public Offerings, Joint Ventures and Technology Licensing
Michael J. Patrick, Partner, Corporate Group
Mr. Patrick's practice focuses on venture capital financings representing both companies and venture capital firms, mergers and acquisitions and general corporate representation for a broad array of high technology companies in the information technology, life science and medical device industries. Mr. Patrick also has extensive experience in dispute resolution and litigation for technology companies. Mr. Patrick is the author of "Managing Corporate Electronic Information: A Risk Manager's Guide" (1995) and the co-author of Fenwick & West's quarterly venture financing terms survey. His empahsis is on: Venture finance and fund formation, Mergers and acquisitions and General corporate representation.
Fenwick & West is a national law firm that provides comprehensive legal services to technology and life sciences clients of national and international prominence. We have approximately 300 attorneys, with offices in Silicon Valley, San Francisco, Seattle and Boise.
For additional information about this report please contact Barry Kramer at 650-335-7278; bkramer@fenwick.com or Michael Patrick at 650-335-7273; mpatrick@fenwick.com at Fenwick & West. The contents of this report are not intended, and should not be considered, as legal advice or opinion.
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©2010 Fenwick & West LLP
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