Wilson Sonsini Goodrich & Rosati: The Entrepreneurs Report Q3, 2012

This in-depth report analyzes the key issues and trends the firm has observed in recent private company financings.

Deal Terms

Liquidation preferences. Senior liquidation preferences were used in 39% of all Series B and later deals in the first three quarters of 2012, down from 47% of deals in 2011 and 50% in 2010. The use of such preferences decreased in both up rounds, from 34% of deals in 2011 to 28% in the first three quarters of 2012, and down rounds, from 79% of deals in 2011 to 63% in Q1-3 2012.
Conversely, the use of pari passu liquidation preferences increased to 58% of Q1-Q3 2012 financings from 51% of 2011 financings and 48% of 2010 financings. The percentage increased both for up rounds (69% in Q1-Q3 2012 versus 64% in 2011) and down rounds (34% in Q1-Q3 2012 versus 18% in 2011).
These trends likely reflect the increasing valuations in later-stage rounds in 2012 as compared with 2011 and, thus, the corresponding greater negotiating power of earlier investors.

Participation rights. The proportion of deals with non-participating preferred stock continued to increase in the first three quarters of 2012 as compared with prior years, to 66% in Q1-Q3 2012 from 58% in 2011 and 49% in 2010. The proportion increased both in up rounds, from 59% in 2011 to 68% in Q1-Q3 2012, and in down rounds, from 32% in 2011 to 38% in Q1-Q3 2012. The percentage of deals with capped participating preferred stock remained at 16% in Q1-Q3 2012, the same level as for 2011, while the percentage with fully participating preferred stock decreased from 26% in 2011 to 18% in Q1-Q3 2012. Again, these trends likely reflect the increasing valuations in later-stage rounds in 2012 as compared with 2011 and, thus, the corresponding greater negotiating power of companies and earlier investors.

Anti-dilution provisions. Broad-based weightedaverage anti-dilution protection provisions continued to be overwhelmingly prevalent, being used in 91% of Q1-Q3 2012 deals, the same percentage as in each of 2010 and 2011. Broadbased weighted-average was used in 93% of Q1-Q3 2012 up rounds, as compared with 91% of such rounds in 2011, and in 80% of Q1-Q3 2012 down rounds, unchanged from 2011. The use of full-ratchet anti-dilution stayed level at 3% of financings in Q1-Q3 2012, the same proportion as in 2011.

Pay-to-play provisions. The use of pay-to-play provisions decreased slightly, from 12% of 2011 deals to 11% of those in Q1-Q3 2012. Pay-to-play usage decreased slightly in both up rounds, from 5% of 2012 financings to 4% of Q1-Q3 2012 deals, and down rounds, from 31% of 2011 financings to 29% of Q1-Q3 2012 deals.

Redemption. The use of redemption provisions dropped slightly, from 24% of deals in 2011 to 23% in Q1-Q3 2012. Investor-option redemption (used in 22% of deals) continued to be far more popular than mandatory redemption (1%).

Bridge Loan Terms

For the first time, we include data on bridge loans in the Entrepreneurs Report. Venture stage companies frequently raise funds through such financings, almost always through convertible notes, either before their first true equity financing round (termed “Pre Series
A” in the table below) or to bridge the companies between later-stage equity rounds (“Post Series A”). These financings increasingly are favored because they typically can be negotiated and closed far more quickly and cheaply than priced equity financings, as there are fewer terms and, as a result, much shorter documentation. Clients frequently ask WSGR attorneys for benchmark data on the terms of such bridge loans, including interest rates, maturities, subordination, and conversion prices and discounts, so we are pleased to present the data below as a service to both companies and investors.
The data in the chart is aggregated from 2012 debt financings through September 30, 2012, in which Wilson Sonsini Goodrich & Rosati represented either the company or an investor.

Рисунок1

1 Of the Pre Series A bridges that have warrants, 50% also have a discount on conversion into equity. For Post Series A bridges with warrants, 22% also have a discount on conversion into equity.
2 Of the Pre Series A bridges that have a discount on conversion into equity, 7% have warrants. For Post Series A bridges that have a discount on conversion into equity, 20% have warrants.

EntrepreneursReport-Q3-2012

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