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Trends in Deal Terms
Set forth below are our findings based on a review of the 34 publicly-reported venture capital financings that took place in the Mid-Atlantic region during the third quarter of 2003.
Financing Round
The financings we reviewed ran the gamut from Series A to Series F with a distribution as follows:
Series
Current Quarter
A
11 out of 34 or 32%
B
5 out of 34 or 15%
C
9 out of 34 or 26%
D
1 out of 34 or 3%
E
6 out of 34 or 18%
F
2 out of 34 or 6%
Price Direction
Overall, a significant majority of transactions were Down Rounds.
Price Change
Current Quarter
Down
22 out of 28 or 79%
Unchanged
1 out of 28 or 4%
Up
5 out of 28 or 18%
There was no statistically significant variation within the various rounds:
Series
Current Quarter
B
4 out of 5 or 80%
C
7 out of 9 or 78%
D or later
6 out of 9 or 75%
Cumulative Dividends
Overall, a significant majority of transactions included cumulative dividends:
Current Quarter
23 out of 34 or 68%
There was no discernable pattern within the various rounds:
Series
Current Quarter
A
8 out of 11 or 73%
B
5 out of 5 or 100%
C
5 out of 9 or 56%
D
1 out of 1 or 100%
E or later
4 out of 8 or 50%
Liquidation Preferences
Preference Multiples
Each deal had a Liquidation Preference for the most recent round that was at least pari passu with previous rounds, and in almost every case the latest round was senior to previous rounds. The preference multiples had the following distribution:
Liquidation Preference
Current Quarter
1X
22 out of 34 or 65%
1X – 2X
8 out of 34 or 24%
2X-3X
0 out of 34 or 0%
3X+
4 out of 34 or 12%
Participation
While the Liquidation Preference multiples were fairly low, almost every deal included participation for the most senior series of Preferred Stock:
Current Quarter
28 out of 34 or 82%
Redemption
Mandatory or Voluntary Redemption provisions are a staple term of most deals in the region:
Current Quarter
27 out of 34 or 79%
Antidilution
Full Ratchet Antidilution Protection is used in a significant number of deals.
Antidilution Type
Current Quarter
Full Ratchet
17 out of 34 or 50%
Weighted Average
17 out of 34 or 50%
Pay to Play
Pay to Play provisions were not present in significant numbers in the most recent quarter and such deals were evenly divided between those that forced conversion to Common Stock versus those that forced conversion to a shadow Preferred Stock:
Conversion to
Current Quarter
Common
2 out of 34 or 6%
Shadow Preferred
2 out of 34 or 6%
Corporate Reorganization/Recapitalization
A few of the transactions we reviewed included a Reorganization or Recapitalization where the outstanding capital of the company was significantly changed at the time of the financing.
Current Quarter
5 out of 34 or 15%
The two types of reorganizations that we found were (1) reverse splits (aka combinations), which were present as follows:
Current Quarter
3 out of 34 or 9%
and (2) forced conversion of senior securities into junior securities:
Current Quarter
5 out of 34 or 15%
Conclusions
The overall dollar level of venture investment in the Mid-Atlantic region continued to decline in the Third Quarter of 2003 from the historical highs of mid-2000. Nevertheless, anecdotal data suggests a resurgence of transaction activity in the pipeline for the Fourth Quarter of 2003, continuing into 2004.
A comparison of this quarter's data with publicly available historical data suggests that actual Series A Rounds (i.e., a Round not coupled with a restructuring or recapitalization) are increasing as a percentage of transactions. Additionally, it appears that Liquidation Preferences are trending back towards a customary 1X to 2X level. Down Rounds continue to constitute the great majority of financings, which suggests that the “post bubble” price correction continues. Also, interesting is a decline in the number of restructuring transactions, which also suggests that the companies that are able to obtain venture financing are generally progressing in a way that does not require draconian measures to obtain the financing.
The combination of a healthier technology stock market, a higher percentage of truly “new” Series A deals, and a lower number of restructuring transactions, leads us to believe that the venture market is much closer to the end of its “post bubble” adjustment than the beginning. If this is correct, we would expect to see a higher percentage of Up Rounds in subsequent surveys.
We do not see this market returning to 2000 levels any time soon (if at all), but are optimistic that 2004 will be a good year for venture participants.
Methodology
We defined the Mid-Atlantic Region as North Carolina, Virginia, Washington, DC, Maryland, Delaware and the area of New Jersey and Pennsylvania south of Princeton. We reviewed 34 Preferred Stock investments made by venture capitalists within the Mid-Atlantic Region during the period July 1, 2003 – September 30, 2003. For preparation of our survey, we examined publicly available sources and gathered additional information and insights on a confidential basis from market participants.
We counted an Antidilution Protection as Full Ratchet even if the ratchet expired after a condition, such as the passage of time, was met. In addition, we did not break down whether Weighted Average Antidilution was Broad or Narrow.
Percentages in the charts may not add up to 100% due to rounding.
The publisher of this newsletter is not engaged in rendering legal, accounting, financial, investment advisory or other professional services, and this publication is not meant to constitute legal, accounting, financial, investment advisory or other professional advice. If legal, financial, investment advisory or other professional assistance is required, the services of a competent professional person should be sought.
Set forth below are our findings based on a review of the 34 publicly-reported venture capital financings that took place in the Mid-Atlantic region during the third quarter of 2003.
Financing Round
The financings we reviewed ran the gamut from Series A to Series F with a distribution as follows:
Series
Current Quarter
A
11 out of 34 or 32%
B
5 out of 34 or 15%
C
9 out of 34 or 26%
D
1 out of 34 or 3%
E
6 out of 34 or 18%
F
2 out of 34 or 6%
Price Direction
Overall, a significant majority of transactions were Down Rounds.
Price Change
Current Quarter
Down
22 out of 28 or 79%
Unchanged
1 out of 28 or 4%
Up
5 out of 28 or 18%
There was no statistically significant variation within the various rounds:
Series
Current Quarter
B
4 out of 5 or 80%
C
7 out of 9 or 78%
D or later
6 out of 9 or 75%
Cumulative Dividends
Overall, a significant majority of transactions included cumulative dividends:
Current Quarter
23 out of 34 or 68%
There was no discernable pattern within the various rounds:
Series
Current Quarter
A
8 out of 11 or 73%
B
5 out of 5 or 100%
C
5 out of 9 or 56%
D
1 out of 1 or 100%
E or later
4 out of 8 or 50%
Liquidation Preferences
Preference Multiples
Each deal had a Liquidation Preference for the most recent round that was at least pari passu with previous rounds, and in almost every case the latest round was senior to previous rounds. The preference multiples had the following distribution:
Liquidation Preference
Current Quarter
1X
22 out of 34 or 65%
1X – 2X
8 out of 34 or 24%
2X-3X
0 out of 34 or 0%
3X+
4 out of 34 or 12%
Participation
While the Liquidation Preference multiples were fairly low, almost every deal included participation for the most senior series of Preferred Stock:
Current Quarter
28 out of 34 or 82%
Redemption
Mandatory or Voluntary Redemption provisions are a staple term of most deals in the region:
Current Quarter
27 out of 34 or 79%
Antidilution
Full Ratchet Antidilution Protection is used in a significant number of deals.
Antidilution Type
Current Quarter
Full Ratchet
17 out of 34 or 50%
Weighted Average
17 out of 34 or 50%
Pay to Play
Pay to Play provisions were not present in significant numbers in the most recent quarter and such deals were evenly divided between those that forced conversion to Common Stock versus those that forced conversion to a shadow Preferred Stock:
Conversion to
Current Quarter
Common
2 out of 34 or 6%
Shadow Preferred
2 out of 34 or 6%
Corporate Reorganization/Recapitalization
A few of the transactions we reviewed included a Reorganization or Recapitalization where the outstanding capital of the company was significantly changed at the time of the financing.
Current Quarter
5 out of 34 or 15%
The two types of reorganizations that we found were (1) reverse splits (aka combinations), which were present as follows:
Current Quarter
3 out of 34 or 9%
and (2) forced conversion of senior securities into junior securities:
Current Quarter
5 out of 34 or 15%
Conclusions
The overall dollar level of venture investment in the Mid-Atlantic region continued to decline in the Third Quarter of 2003 from the historical highs of mid-2000. Nevertheless, anecdotal data suggests a resurgence of transaction activity in the pipeline for the Fourth Quarter of 2003, continuing into 2004.
A comparison of this quarter's data with publicly available historical data suggests that actual Series A Rounds (i.e., a Round not coupled with a restructuring or recapitalization) are increasing as a percentage of transactions. Additionally, it appears that Liquidation Preferences are trending back towards a customary 1X to 2X level. Down Rounds continue to constitute the great majority of financings, which suggests that the “post bubble” price correction continues. Also, interesting is a decline in the number of restructuring transactions, which also suggests that the companies that are able to obtain venture financing are generally progressing in a way that does not require draconian measures to obtain the financing.
The combination of a healthier technology stock market, a higher percentage of truly “new” Series A deals, and a lower number of restructuring transactions, leads us to believe that the venture market is much closer to the end of its “post bubble” adjustment than the beginning. If this is correct, we would expect to see a higher percentage of Up Rounds in subsequent surveys.
We do not see this market returning to 2000 levels any time soon (if at all), but are optimistic that 2004 will be a good year for venture participants.
Methodology
We defined the Mid-Atlantic Region as North Carolina,
We counted an Antidilution Protection as Full Ratchet even if the ratchet expired after a condition, such as the passage of time, was met. In addition, we did not break down whether Weighted Average Antidilution was Broad or Narrow.
Percentages in the charts may not add up to 100% due to rounding.
The publisher of this newsletter is not engaged in rendering legal, accounting, financial, investment advisory or other professional services, and this publication is not meant to constitute legal, accounting, financial, investment advisory or other professional advice. If legal, financial, investment advisory or other professional assistance is required, the services of a competent professional person should be sought.
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