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Down Round Concerns

VC Experts Intelligence Team


The need of a start-up for frequent and regular infusions of cash is an imperative of the business, part of the culture of venture-backed startups. A sensible financing strategy focuses not only on the round on the table, but on the impact of subsequent rounds as well. Ultimate dilution of the founder will depend on the success or failure of the company in raising subsequent rounds at higher prices. [1]

Take a sample of 100 venture-backed companies successful enough to undertake an initial public offering. In a high percentage of the transactions, the prospectus discloses that the earliest stage investors (founders and angels) wind up with close to trivial equity percentages and thus, puny returns on their investment in the company. One would think that these investors are entitled to the lushest rewards because of the high degree of risk accompanying their early stage investments, cash and/or sweat. The problem, however, is dilution. Most early stage companies go through multiple rounds of private financing, and one or more of those rounds is often a "down round," which entails a disappointing price per share and, therefore, significant dilution to those shareholders who are not in a position to play in the later rounds. [2]

For illustrative purposes, take Flurry as an example. The Company provides analytics for mobile applications to measure audience reach, engagement, retention, conversions, revenue and more. The Series A investment in 2007 was followed by a down round, which then took the company until their Series D in 2011 to get the share price back to where it was.

Price Per Share With Valuation [3]

[1] "Multiple Round Strategy" – Joe Bartlett, Founder and Chairman of VC Experts
[2] "Three Basic Rules: Dilution, Dilution, Dilution" – Joe Bartlett, Founder and Chairman of VC Experts
[3] Data provided by VC Experts



VC Experts Private Company Profile

Flurry, Inc.

FKA: SVB Technologies, Inc., Flurry provides analytics for mobile applications to measure audience reach, engagement, retention, conversions, revenue and more. The service is completely free, takes just five minutes for basic integration and is continuously updated with the industry's most advanced features. Flurry Analytics is available for iOS, Android, Windows Phone, HTML5/Hybrid Apps/MobileWeb, BlackBerry and JavaME.

  • Address:360 3rd Street, Suite 750 Suite 202, San Francisco CA 94107
  • Geographic Region: Silicon Valley
  • Industry: Software
  • SIC Codes: 7372 - Prepackaged Software (reproduction of software)
  • NAICS Codes: 511210 - Software Publishers
  • Legal Counsel: Goodwin Procter LLP
  • Company Website: https://www.flurry.com

Key Management

  • Simon Khalaf, CEO, President, Director
  • Sean Byrnes, Founder, CTO, Director
  • Jeanne Angelo-Pardo, CFO
  • Prashant Fuloria, Chief Product Officer
  • Richard Firminger, Managing Director Europe
  • Nitin Somalwar, VPE
  • Yannis Dosios, VP, Flurry Network
  • Peter Farago, VP Marketing
  • Sean Galligan, VP Sales, Business Development
  • Sonja Hoel Perkins, Director
  • Nick Mignano, Director
  • Jennifer Scott Fonstad, Director
  • Keval Desai, Director

Investors (current and historic)

Draper Fisher Jurvetson
InterWest Partners LLC
Crosslink Capital Inc
Menlo Ventures
First Round Capital
Union Square Ventures
Draper Richards, L.P.
Borealis Ventures

Comparable Private Companies

Varonis Systems, Inc.
Appirio Inc
Crossbeam Systems, Inc.
Rally Software Development Corp
Infusion Software, Inc.
Guidewire Software, Inc.
Acquia, Inc.
Spiceworks, Inc.
Automattic, Inc.
MINDBODY, Inc.

Fair Market Value per Common Share

Filing Date Shares Price Per Share
10/21/2013 5,399,438 $1.14
05/10/2010 5,498,907 $0.10
05/05/2009 4,486,156 $0.04
02/09/2007 364,937 $0.10
06/13/2005 150,000 $0.01

Investment Data - Preferred

Investment Date Investment Amount Valuation Est. Fully Diluted Shares Preferred Price Per Share
01/21/2014 $0.67M $248,722,910 56,516,374 $4.40
Round: Series D
Direction: Up Round
Liquidation Pref.: Pari Passu
Liq. Multiple: 0 - 1x
Stock Type: Participating Preferred
Capped Participation: No
Anti-Dilution: Weighted Average
Redemption: No
Cumulative Dividends: No
Divided Rate: 8
Pay to Play: No
Reorganization: No
12/06/2013 $11.11M $247,950,257 56,340,807 $4.40
Round: Series D
Direction: Up Round
Liquidation Pref.: Pari Passu
Liq. Multiple: 0 - 1x
Stock Type: Participating Preferred
Capped Participation: No
Anti-Dilution: Weighted Average
Redemption: No
Cumulative Dividends: No
Dividend Rate: 8
Pay to Play: No
Reorganization: No
03/14/2013 $0.76M $234,885,658 53,372,187 $4.40
Round: Series D
Direction: Up Round
Liquidation Pref.: Pari Passu
Liq. Multiple: 0 - 1x
Stock Type: Participating Preferred
Capped Participation: No
Anti-Dilution: Weighted Average
Redemption: No
Cumulative Dividends: No
Dividend Rate: 8
Pay to Play: No
Reorganization: No
11/01/2012 $24.24M $233,994,553 53,169,704 $4.40
Round: Series D
Direction: Up Round
Liquidation Pref.: Pari Passu
Liq. Multiple: 0 - 1x
Stock Type: Participating Preferred
Capped Participation: No
Anti-Dilution: Weighted Average
Redemption: No
Cumulative Dividends: No
Dividend Rate: 8
Pay to Play: No
Reorganization: No
11/30/2010 $14.80M $86,047,946 46,689,064 $1.84
Round: Series C
Direction: Up Round
Liquidation Pref.: Pari Passu
Liq. Multiple: 0 - 1x
Stock Type: Participating Preferred
Capped Participation: No
Anti-Dilution: Weighted Average
Redemption: No
Cumulative Dividends: No
Dividend Rate: 8
Pay to Play: No
Reorganization: No
12/31/2009 $6.95M $20,332,960 37,239,855 $0.55
Round: Series B
Direction: Up
Liquidation Pref.: Pari Passu
Liq. Multiple: 0 - 1x
Stock Type: Participating Preferred
Capped Participation: No
Anti-Dilution: Weighted Average
Redemption: No
Cumulative Dividends: No
Dividend Rate: 8
Pay to Play: No
Reorganization: No
05/04/2009 $1.21M $1,717,795 13,213,810 $0.13
Round: Series A
Direction: Down
Liquidation Pref.: Pari Passu
Liq. Multiple: 0 - 1x
Stock Type: Participating Preferred
Capped Participation: No
Anti-Dilution: Weighted Average
Redemption: No
Cumulative Dividends: No
Dividend Rate: 7.69
Pay to Play: Yes
Pay to Play Penalties: Conversion of Preferred Stock into Common Stock
Reorganization: No
01/31/2007 $3.75M $10,111,671 2,423,234 $4.17
Round: Series A
Direction: Not Applicable
Liquidation Pref.: Not Applicable
Liq. Multiple: 0 - 1x
Stock Type: Conventional Convertible
Capped Participation: Not Applicable
Anti-Dilution: Weighted Average
Redemption: No
Cumulative Dividends: No
Dividend Rate: 8
Pay to Play: No
Reorganization: No

VC Experts.com, Inc. Disclaimer: The information contained herein is from sources deemed reliable; it does not, however, purport to constitute investment advice nor does VC Experts represent that it contains all information concerning the identified Company deemed necessary or appropriate for investment decisions. VC Experts is neither a broker/dealer nor investment adviser and has no financial interest in the Company analyzed nor in the sale or purchase of any of its securities. The information and data are for reference purposes only and no implied or expressed warranties or assurances as to its accuracy or completeness are furnished by VC Experts. Estimates of valuation are, as indicated, estimates based on such information as we found available, the completeness of which is neither represented or guaranteed; users for any purpose are cautioned and required to undertake and perform their own investigations and due diligence. To the extent that the information incorporates content from specified sources of financial information, VC Experts disclaims any responsibility for the accuracy or completeness of such content.

About VC Experts.com, Inc.: VC Experts.com provides specialized content, valuation & term sheet data on thousands of venture capital financing events, and analytics for managing & modeling private company capital structures. Visit VCExperts.com for more information.






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What Do The Deal Terms Mean?

Conventional Convertible Preferred Stock: A type of preferred stock that can also be referred to as "Non-Participating Preferred Stock". This preferred stock typically receives a liquidation preference prior to the common stock, and does not participate on an "as if converted basis" with common stock in any remaining proceeds of a defined "liquidation" event. Upon such a "liquidation" event, holders of Conventional Convertible Preferred Stock must choose whether to receive their liquidation preference or convert their shares to Common Stock in order to participate in the pro rata distribution of assets.

Dividends: The payments designated by the Board of Directors to be distributed among the shares outstanding. The type of share determines the amount. On preferred shares, it is generally a fixed amount. With common shares, the dividend can be omitted if the Directors decide to invest the money in a capital expenditure or if the business is slumping. If the dividend is paid, the amount varies depending on the amount of cash on hand.

There are several types of dividends:

Cumulative—Missed dividend payments that continue to accrue.

Non-cumulative—Missed dividend payments that do not accrue.

Participating—Dividends which share (participate) with common stock.

Non-participating—Dividends which do not share with common stock.

Liquidation Preference/Multiple: The amount per share that a holder of a given series of Preferred Stock will receive prior to distribution of amounts to holders of other series of Preferred Stock or Common Stock. This is usually designated as a multiple of the Issue Price, for example 2X or 3X, and there may be multiple layers of Liquidation Preferences as different groups of investors buy shares in different series. For example, holders of Series B Preferred Stock may be entitled to receive 3X their Issue Price, and then if any money is left, holders of Series A Preferred Stock may be entitled to receive 2X their Issue Price and then holders of Common Stock receive whatever is left. The trigger for the payment of the Liquidation Preference is typically a sale or liquidation of the company, such as a merger or sale of assets.

Anti Dilution Protection: Contractual measures that allow investors in convertible preferred shares an automatic reduction in the conversion price, meaning more common shares on conversion, if a subsequent round is a "down round," thereby mitigating down round dilution.

Pay-to-Play Provisions: A "Pay to Play" provision is a requirement for an existing investor to participate in a subsequent investment round, especially a Down Round. Where Pay to Play provisions exist, an investor's failure to purchase its pro-rata portion of a subsequent investment round will result in conversion of that investor's Preferred Stock into Common Stock or another less valuable series of Preferred Stock.

Post-Money Valuation: The valuation of a company immediately after the most recent round of financing. For example, a venture capitalist may invest $3.5 million in a company valued at $2 million "pre-money" (before the investment was made). As a result, the startup will have a post-money valuation of $5.5 million.


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