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Multimarket Venture Capital Survey Data: Q1 2005 (Fish & Richardson)

Chip Korn, Fish & Richardson, PC


Set forth below are our findings based on a review of the publicly reported venture capital financings that took place in five regions during the first quarter of 2005. We looked at financings in the Mid-Atlantic, New York Metro, New England, Southwest, and Southern California regions.

Financing Round

The financings we reviewed ran the gamut from Series A to Series E with a distribution as follows:

Series Q1 '05 Q4 '04 Q3 '04 Q2 '04
A 19% 28% 23% 26%
B 30% 32% 34% 33%
C 33% 21% 19% 18%
D or later 18% 18% 24% 23%

Price Direction

Two-thirds of financings were Up Rounds:

Price Change Q1 '05 Q4 '04 Q3 '04 Q2 '04
Down 24% 33% 26% 29%
Unchanged 19% 10% 14% 23%
Up 67% 57% 59% 48%

Cumulative Dividends

Again this quarter, Cumulative Dividends were present in approximately half of the transactions, although there was significant regional variation:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
48% 47% 43% 44%

Liquidation Preferences

Preference Multiples

All financings had a Liquidation Preference for the most recent round that was at least pari passu with previous rounds, and in most cases the latest round was senior to previous rounds. The preference multiples had the following distribution:

Liquidation Prefs Q1 '05 Q4 '04 Q3 '04 Q2 '04
1 x 86% 88% 85% 83%
>1 x - 2 x 11% 9% 13% 13%
>2 x - 3 x 3% 3% 2% 3%

Participation

While the Liquidation Preference multiples were fairly low, three-quarters of all deals included participation for the most senior series of Preferred Stock. In over one-third of the deals which provided participation rights, such participation was subject to some stated cap on returns, ranging anywhere from two to seven times the original issue price.

Q1 '05 Q4 '04 Q3 '04 Q2 '04
77% 76% 76% 76%

Redemption

Mandatory or Voluntary Redemption was generally present, although there was significant regional variation:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
77% 73% 80% 75%

Antidilution

Full Ratchet Antidilution Protection was rarely used; a few deals had no Antidilution Price Protection:

Antidilution Type Q1 '05 Q4 '04 Q3 '04 Q2 '04
Full Ratchet 18% 15% 16% 20%
Weighted Average 82% 83% 81% 78%

Pay to Play

About one in five deals included a Pay to Play provision. Such deals were divided between those that forced conversion to Common Stock and those that forced conversion to a Shadow Preferred Stock:

Conversion to Q1 '05 Q4 '04 Q3 '04 Q2 '04
Common Stock 20% 10% 21% 13%
Shadow Preferred 4% 12% 5% 6%

Corporate Reorganization/Recapitalization

A few of the transactions we reviewed included a Reorganization or Recapitalization pursuant to which the outstanding capital stock of the company was significantly changed at the time of the financing:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
11% 10% 9% 10%

The two types of reorganizations that we found were (1) reverse splits (aka combinations), which were present as follows (some transactions included both types):

Q1 '05 Q4 '04 Q3 '04 Q2 '04
1% 5% 8% 7%

and (2) forced conversion of senior securities into junior securities:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
10% 5% 2% 3%

Conclusions

The US venture market experienced a decline in aggregate venture capital investments in the first quarter of '05 as compared to the prior quarter. This is not surprising, as such a dropoff is commonly seen in the first calendar quarter as venture-capital firms tend to focus on fund raising and administrative matters during the first quarter of the year. Notwithstanding this decline, according to the MoneyTree Survey by PWC, NVCA and Thomson Venture Economics, first-time fundings, i.e., venture investments into companies not previously venture-backed, neared a two year high in the first quarter of '05. Companies receiving such first-time funding tended to be more mature companies; provided, however, there appears to be a greater appetite for the riskier startup investment in some "hotbed" regions of the United States, particularly Southern California.

The results of our survey this quarter continue the trend of the past couple of quarters that the market has reached a point of equilibrium. Deal terms remained fairly consistent with the prior quarter with the notable exception of an increase in the number of deals with Pay to Play provisions (particularly forced conversions to common stock).

We also noted an increase in Series C financings as a portion of overall deals and a continued increase in up rounds, which constituted two-thirds of financings during the first quarter of '05. The increase in later-stage financings indicates the venture capital market remains focused on exit strategies and strength of management as many of the companies receiving later-stage funding have proven themselves through the lean years after receiving their first rounds of financing during the boom years.

For further information please contact:

Peter "Chip" Korn
korn@fr.com
212-641-2336

Jennifer L. Williams
jlw@fr.com
214-292-4015

Methodology

We reviewed Preferred Stock investments made by venture capitalists within the regions broken down on the following pages during the period January 1, 2005 - March 31, 2005. 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.

Please see the attached glossary for an explanation of the terms used in this survey.

Mid-Atlantic Venture Capital Survey
NY Metro Venture Capital Survey
New England Venture Capital Survey
Southwest Venture Capital Survey
Southern California Venture Capital Survey
Venture Capital Glossary

Mid-Atlantic Venture Capital Survey

Set forth below are our findings based on a review of the publicly reported venture capital financings that took place in the Mid-Atlantic region during the first quarter of 2005.

Financing Round

The financings we reviewed ran the gamut from Series A to Series E with a distribution as follows:

Series Q1 '05 Q4 '04 Q3 '04 Q2 '04
A 7% 17% 35% 52%
B 47% 57% 40% 20%
C 33% 9% 5% 12%
D or later 13% 17% 25% 16%

Price Direction

The deals were predominently Up Rounds:

Price Change Q1 '05 Q4 '04 Q3 '04 Q2 '04
Down 5% 45% 50% 50%
Unchanged 8% 5% 8% 0%
Up 77% 50% 42% 50%

Cumulative Dividends

A significant majority of transactions continued to include Cumulative Dividends:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
73% 78% 60% 76%

Liquidation Preferences

Preference Multiples

Each financing had a Liquidation Preference for the most recent round that was at least pari passu with previous rounds, and in the majority of cases the latest round was senior to previous rounds. The preference multiples had the following distribution:

Liquidation Prefs Q1 '05 Q4 '04 Q3 '04 Q2 '04
1 x 80% 82% 85% 64%
>1 x - 2 x 13% 9% 10% 16%
>2 x - 3 x 7% 9% 5% 20%

Participation

While the Liquidation Preference multiples continue to be fairly low, almost every deal included participation for the most senior series of Preferred Stock. In roughly one-fifth of the deals which provided for such participation rights, the aggregate returns of the Preffered Stock were subject to some cap, ranging from three to eight times the original issue price.

Q1 '05 Q4 '04 Q3 '04 Q2 '04
93% 91% 95% 96%

Redemption

Mandatory or Voluntary Redemption provisions are a staple term of financings in the region:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
73% 83% 80% 84%

Antidilution

Weighted Average was used in almost all deals this quarter.

Antidilution Type Q1 '05 Q4 '04 Q3 '04 Q2 '04
Full Ratchet 7% 29% 25% 32%
Weighted Average 93% 71% 75% 68%

Pay to Play

Pay to Play were much more comon in the most recent quarter; appearing in about one-half of the deals.

Conversion to Q1 '05 Q4 '04 Q3 '04 Q2 '04
Common Stock 33% 14% 10% 16%
Shadow Preferred 22% 4% 10% 0%

Corporate Reorganization/Recapitalization

Only a small number of the transactions we reviewed this quarter included a Reorganization or Recapitaliza-tion pursuant to which the outstanding capital of the company was significantly changed at the time of the financing:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
12% 4% 0% 16%

The two types of reorganizations that we look for are (1) reverse splits (aka combinations), which were present as follows (transactions in some quarters included both types):

Q1 '05 Q4 '04 Q3 '04 Q2 '04
6% 4% 0% 23%

and (2) forced conversion of senior securities into junior securities:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
6% 0% 0% 4%

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.

NY Metro Venture Capital Survey

Set forth below are our findings based on a review of the publicly reported venture capital financings that took place in the NY Metro region during the first quarter of 2005.

Financing Round

The financings we reviewed ran the gamut from Series A to Series D with a distribution as follows:

Series Q1 '05 Q4 '04 Q3 '04 Q2 '04
A 25% 25% 7% 33%
B 33% 31% 14% 38%
C 33% 13% 43% 8%
D or later 8% 31% 36% 21%

Price Direction

Half of the financings were Up Rounds:

Price Change Q1 '05 Q4 '04 Q3 '04 Q2 '04
Down 50% 17% 15% 25%
Unchanged 0% 33% 31% 38%
Up 50% 50% 54% 38%

Cumulative Dividends

Half of the transactions included Cumulative Dividends:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
50% 44% 57% 54%

Liquidation Preferences

Preference Multiples

Each financing 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. Most deals were done at a 1x preference. The preference multiples had the following distribution:

Liquidation Preference Q1 '05 Q4 '04 Q3 '04 Q2 '04
1 x 84% 81% 86% 92%
>1 x - 2 x 8% 19% 14% 0%
>2 x - 3 x 8% 0% 0% 8%

Participation

Although Liquidation Preference multiples were very low, most financings included participation for the most senior series of Preferred Stock.

Q1 '05 Q4 '04 Q3 '04 Q2 '04
75% 88% 64% 58%

Redemption

Mandatory or Voluntary Redemption provisions are a common term of financings in the region although the decline in redemption provisions continued this quarter, and this may suggest a greater comfort with the availability of exits:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
58% 56% 64% 63%

Antidilution

"Full Ratchet" antidilution protection was more prevalant this quarter, but still present in less than half the deals.

Antidilution Type Q1 '05 Q4 '04 Q3 '04 Q2 '04
Full Ratchet 42% 6% 0% 13%
Weighted Average 58% 94% 100% 83%

Pay to Play

None of the transactions reviewed this quarter contained Pay to Play provisions.

Conversion to Q1 '05 Q4 '04 Q3 '04 Q2 '04
Common Stock 0% 0% 7% 17%
Shadow Preferred 0% 18% 7% 4%

Corporate Reorganization/Recapitalization

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:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
16% 12% 14% 4%

The two types of reorganizations that we look for are (1) reverse splits (aka combinations), which were present as follows (in some quarters transactions contained both types):

Q1 '05 Q4 '04 Q3 '04 Q2 '04
0% 6% 14% 4%

and (2) forced conversion of senior securities into junior securities:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
16% 6% 0% 0%

Methodology

We defined the NY Metro Region as the state of New York and the area of New Jersey and Pennsylvania north of Princeton.

New England Venture Capital Survey

Set forth below are our findings based on a review of the publicly reported venture capital financings that took place in the New England region during the first quarter of 2005.

Financing Round

The financing rounds broke down as follows:

Series Q1 '05 Q4 '04 Q3 '04 Q2 '04
A 6% 37% 32% 22%
B 32% 29% 21% 33%
C 35% 16% 21% 28%
D or later 26% 18% 26% 15%

Price Direction

There were more Up Rounds than Down Rounds:

Price Change Q1 '05 Q4 '04 Q3 '04 Q2 '04
Down 11% 24% 15% 28%
Unchanged 7% 11% 15% 17%
Up 82% 65% 69% 56%

Cumulative Dividends

Just over half of the transactions included Cumulative Dividends:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
52% 53% 37% 41%

Liquidation Preferences

Preference Multiples

Each financing had a Liquidation Preference for the most recent round that was at least pari passu with previous rounds, with roughly half the deals being senior to previous rounds. The preference multiples had the following distribution:

Liquidation Preference Q1 '05 Q4 '04 Q3 '04 Q2 '04
1 x 84% 90% 84% 98%
>1 x - 2 x 13% 6% 11% 2%
>2 x - 3 x 3% 4% 5% 0%

Participation

While the Liquidation Preference multiples were low this quarter, a majority of the deals again included participation for the most senior series of Preferred Stock although participation is not as common as in other regions. In roughly one-quarter of the deals which provided participation rights, such participation was subject to some stated cap on returns, generally two to three times the orginal purchase price.

Q1 '05 Q4 '04 Q3 '04 Q2 '04
71% 63% 63% 70%

Redemption

Mandatory or Voluntary Redemption provisions were widely used this quarter:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
97% 88% 95% 63%

Antidilution

Full Ratchet Antidilution Protection was not used in a significant number of deals:

Antidilution Type Q1 '05 Q4 '04 Q3 '04 Q2 '04
Full Ratchet 16% 14% 5% 15%
Weighted Average 84% 86% 89% 85%

Pay to Play

Pay to Play provisions were present in one in four deals this quarter.

Conversion to Q1 '05 Q4 '04 Q3 '04 Q2 '04
Common Stock 16% 14% 16% 20%
Shadow Preferred 6% 14% 5% 13%

Corporate Reorganization/Recapitalization

A few of the transactions we reviewed included a Reorganization or Recapitalization pursuant to which the outstanding capital of the company was significantly changed at the time of the financing:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
10% 11% 10% 9%

The two types of reorganizations that we look for are (1) reverse splits (aka combinations), which were present as follows (transactions in some quarters included both types):

Q1 '05 Q4 '04 Q3 '04 Q2 '04
4% 4% 5% 9%

and (2) forced conversion of senior securities into junior securities:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
6% 7% 5% 0%

Methodology

We defined the New England region as the states of Massachusetts, Maine, New Hampshire, Vermont, Rhode Island, and Connecticut.

Southwest Venture Capital Survey

Set forth below are our findings based on a review of the publicly reported venture capital financings that took place in the Southwest region during the first quarter of 2005.

Financing Round

The financing rounds broke down as follows:

Series Q1 '05 Q4 '04 Q3 '04 Q2 '04
A 33% 13% 7% 21%
B 27% 27% 43% 33%
C 27% 47% 7% 3%
D or later 13% 13% 43% 38%

Price Direction

About half of the financings in this region were Down Rounds:

Price Change Q1 '05 Q4 '04 Q3 '04 Q2 '04
Down 50% 40% 15% 26%
Unchanged 30% 0% 8% 21%
Up 20% 60% 77% 53%

Cumulative Dividends

Cumulative Dividends were present in roughly one-third of transactions this quarter:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
33% 46% 29% 33%

Liquidation Preferences

Preference Multiples

Each financing had a Liquidation Preference for the most recent round that was at least pari passu with previous rounds, and in most cases the latest round was senior to previous rounds. The preference multiples had the following distribution:

Liquidation Preference Q1 '05 Q4 '04 Q3 '04 Q2 '04
1 x 93% 93% 93% 75%
>1 x - 2 x 7% 7% 7% 21%
>2 X - 3 X 0% 0% 0% 6%

Participation

While the Liquidation Preference multiples were fairly low, many included participation for the most senior series of Preferred Stock. In roughly one-third of the deals which provided such participation rights, the aggregate returns of the Preferred Stock were subject to some cap, typically two to four times the original issue price.

Q1 '05 Q4 '04 Q3 '04 Q2 '04
71% 67% 79% 83%

Redemption

Mandatory or Voluntary Redemption is a staple term for deals in the region:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
73% 71% 64% 58%

Antidilution

All but two deals had some form of anti-dilution protection. Full Ratchet Antidilution Protection was used in over one-quarter of the deals:

Antidilution Type Q1 '05 Q4 '04 Q3 '04 Q2 '04
Full Ratchet 27% 23% 29% 25%
Weighted Average 73% 77% 71% 71%

Pay to Play

Pay to Play provisions were present in almost half of the financings in the most recent quarter.

Conversion to Q1 '05 Q4 '04 Q3 '04 Q2 '04
Common Stock 47% 7% 29% 17%
Shadow Preferred 0% 20% 0% 0%

Corporate Reorganization/Recapitalization

Two of the transactions we reviewed included a Reorganization or Recapitalization pursuant to which the outstanding capital of the company was significantly changed at the time of the financing:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
7% 7% 7% 8%

The two types of reorganizations that we found were (1) reverse splits (aka combinations), which were present as follows (one transaction included both types):

Q1 '05 Q4 '04 Q3 '04 Q2 '04
0% 7% 7% 4%

and (2) forced conversion of senior securities into junior securities:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
7% 0% 0% 8%

Chris McNeill, an attorney in the Dallas office of Fish & Richardson P.C. assisted in the preparation of the Southwest Venture Capital Survey.

Methodology

We defined the Southwest Region as the states of Texas, Oklahoma, New Mexico, Arkansas, and Louisiana.

Southern California Venture Capital Survey

Set forth below are our findings based on a review of the publicly reported venture capital financings that took place in the Southern California region during the first quarter of 2005.

Financing Round

The financing rounds broke down as follows:

Series Q1 '05 Q4 '04 Q3 '04 Q2 '04
A 45% 28% 21% 14%
B 0% 20% 46% 38%
C 36% 32% 21% 16%
D or later 18% 20% 13% 32%

Price Direction

Three-quarters of the deals were Up Rounds:

Price Change Q1 '05 Q4 '04 Q3 '04 Q2 '04
Down 25% 41% 31% 25%
Unchanged 0% 12% 16% 34%
Up 75% 47% 53% 40%

Cumulative Dividends

Cumulative Dividends remain relatively rare in this market:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
15% 8% 33% 24%

Liquidation Preferences

Preference Multiples

Each financing had a Liquidation Preference for the most recent round that was at least pari passu with previous rounds. Most deals were done at a 1x preference. The preference multiples had the following distribution:

Liquidation Preference Q1 '05 Q4 '04 Q3 '04 Q2 '04
1 x 82% 92% 79% 78%
>1 x - 2 x 9% 8% 21% 22%
>2 x - 3 x 9% 0% 0% 0%

Participation

While the Liquidation Preference multiples were fairly low, most included participation for the most senior series of Preferred Stock. In roughly one- quarter of the deals which provided participation rights, such participation was subject to some stated cap on returns, generally from two to four times the original issue price.

Q1 '05 Q4 '04 Q3 '04 Q2 '04
69% 84% 71% 76%

Redemption

Mandatory or Voluntary Redemption provisions were present in under one-half of the deals this quarter:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
38% 48% 79% 57%

Antidilution

Full Ratchet Antidilution Protection was rarely used:

Antidilution Type Q1 '05 Q4 '04 Q3 '04 Q2 '04
Full Ratchet 23% 8% 21% 19%
Weighted Average 77% 92% 79% 81%

Pay to Play

Pay to Play provisions were rarely present in deals in the most recent quarter.

Conversion to Q1 '05 Q4 '04 Q3 '04 Q2 '04
Common Stock 15% 8% 29% 8%
Shadow Preferred 0% 4% 4% 8%

Corporate Reorganization/Recapitalization

Only 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:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
8% 16% 13% 11%

The two types of reorganizations that we found were (1) reverse splits (aka combinations), which were present as follows:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
0% 8% 13% 5%

and (2) forced conversion of senior securities into junior securities:

Q1 '05 Q4 '04 Q3 '04 Q2 '04
8% 8% 4% 5%

Methodology

We defined the Southern California Region as the area between the northern edge of Los Angeles County and the border with Mexico.

Venture Capital Glossary

The following is a general review based upon standard practice among venture capitalists and does not constitute an opinion or legal advice. Many of the terms are loosely defined in practice and there are exceptions to every rule, but we have created definitions based upon the most common usage. For further information please email info@fr.com.

Antidilution Protection

Broadly, purchasers of shares in venture financings look for protection against subsequent offerings at lower prices, as well as structural protection against changes in a corporate structure (such as a stock split or recapitalization) affecting in itself the pro rata portion of the company originally purchased. Antidilution Price Protection gives investors in early rounds the benefit of a reduced effective price per share if the company later has a Down Round. Antidilution Price Protection is accomplished by changing the Conversion Ratio and comes in two basic flavors, Weighted Average and Full Ratchet.

Full Ratchet Antidilution Price Protection

"Full Ratchet" (sometimes called "Ratchet") Antidilution provisions reduce the effective per share purchase price of the investor's shares purchased in a round to the actual, lower price set in a later offering or event (for example, a subsequent financing round or issuance of shares as consideration for a transaction) thereby raising the number of shares of Common Stock into which the investor's Preferred Stock will convert. Full Ratchet is more favorable for the investors who receive it and can result in significant dilution for founders and other holders of Common Stock in the event of a Down Round.

Weighted Average Antidilution Price Protection

Weighted Average Antidilution provisions reduce the effective purchase price per share of the investor's shares purchased in a round by a weighted percentage reduction determined by reference to the price decrease and the comparative number of cheaper shares issued to the total number of shares outstanding.

There are subcategories of Weighted Average Antidilution Price Protection - Narrow Based and Broad Based - and each of these two terms has fairly loose definitions. Generally the main difference is in the definition of outstanding shares, with a more broad definition having the result of lessening the price effect of a Down Round on the effective price of an earlier offering. For example, a Narrow Based Weighted Average Antidilution Price Protection Provision might include only Common Stock and convertible Preferred Stock then outstanding, while a Broad Based Weighted Average Antidilution Price Protection Provision would include Common Stock outstanding or issuable upon conversion or exercise of all Preferred Stock, warrants, convertible debt, options and any other contingent right to Common Stock.

To summarize
Broad Based Weighted Average - most favorable to company/founders
Narrow Based Weighted Average - in the middle
Full Ratchet - most favorable to investors

Antidilution Protection of a non-price based nature would be protection against changes to the Conversion Rate in the event of a stock split, stock dividend or similar reorganization. Normally, when investors and venture market participants talk about "Antidilution Protection" they are referencing Antidilution Price Protection.

Common Stock

The standard unit of equity in a company. Common Stock is generally held by founders and some angels. Employee options typically convert into Common Stock. Common Stock is usually the type of security issued in a public offering.

Conversion Rate

The ratio at which each share of Preferred Stock converts into Common Stock. Venture Capitalists typically purchase Preferred Stock that converts into Common Stock at a stated ratio, usually one to one, which then may adjust based upon triggering events such as a Down Round in accordance with Antidilution Protection.

Cumulative Dividends

Dividends that accrue at a fixed rate until paid are "Cumulative Dividends" which are payments to shareholders made with respect to an investor's Preferred Stock. Generally, holders of Preferred Shares are contractually entitled to receive dividends prior to holders of Common Stock. Dividends can accumulate at a fixed rate (for example 8%) or simply be payable as and when determined by a company's Board of Directors in such amount as determined by the board. Because venture backed companies typically need to conserve cash, the use of Cumulative Dividends is customary with the result that the Liquidation Preference increases by an amount equal to the Cumulative Dividends. Cumulative Dividends are often waived if the Preferred Stock converts to Common Stock prior to an ipo but may be included in the aggregate value of Preferred Stock applied to the Conversion Ratio for other purposes. Dividends that are not cumulative are generally called "when, as and if declared dividends."

Down Round

Issuance of shares at a later date and a lower price than previous investment rounds.

Issue Price

The price per share deemed to have been paid for a series of Preferred Stock. This number is important because Cumulative Dividends, the Liquidation Preference and Conversion Ratios are all based on Issue Price. In some cases, it is not the actual price paid. The most common example is where a company does a bridge financing (a common way for investors to provide capital without having to value the company as a whole) and sells debt that is convertible into the next series of Preferred Stock sold by the company at a discount to the Issue Price.

Liquidation Preference

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 2ï or 3ï, 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 3ï their Issue Price, and then if any money is left, holders of Series A Preferred Stock may be entitled to receive 2ï their Issue Price and then holders of Common Stock receive whatever is left. The trigger for the payment of the Liquidation Preference is a sale or liquidation of the company, such as a merger or other transaction where the company stockholders end up with less than half of the ownership of the new entity or a liquidation of the company.

Participation

Describes the right of a holder of Preferred Stock to enjoy both the rights associated with the Preferred Stock and also participate in any benefit available to Common Stock, without converting to Common Stock. This may occur with Liquidation Preferences, for example, a series of Preferred Stock may have the right to receive its Liquidation Preference and then also share in whatever money is left to be distributed to the holders of Common Stock. Dividends may also be "Participating" where after a holder of Preferred Stock receives its Cumulative Dividend it also receives any dividend paid on the Common Stock.

Preferred Stock

The unit of equity in a corporation that is typically sold to venture and other institutional investors. Preferred Stock will usually have preferential rights over the Common Stock with respect to dividends, liquidation, voting, redemption and/or Antidilution Protection. There is nothing automatically "preferred" about Preferred Stock, but rather it has whatever rights are associated with the particular class or series as described in the company's certificate of incorporation. Preferred Stock can be subdivided into one or more different classes or series. Typically, the first series sold to investors will be designated Series A, the next will be Series B and so on. Series A is not necessarily better than Series B, rather the relative rights are governed by the company's certificate of incorporation and one series may have a better dividend preference while another may have a better liquidation preference. However, it is important to note that within a series all shares must have identical rights and be treated equally by the company.

Pay to Play

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.

Redemption

The right or obligation of a company to repurchase its own shares.

Mandatory Redemption

Mandatory Redemption is a right of an investor to require the company to repurchase some or all of an investor's shares at a stated price at a given time in the future. The purchase price is usually the Issue Price, increased by Cumulative Dividends, if any. Mandatory Redemption may be automatic or may require a vote of the series of Preferred Stock having the redemption right.

Voluntary Redemption

Voluntary Redemption is the right of a company to repurchase some or all of an investor's outstanding shares at a stated price at a given time in the future. The purchase price is usually the Issue Price, increased by Cumulative Dividends.

Reorganization or Corporate Reorganization

Reorganizations are significant changes in the equity base of a company such as converting all outstanding shares to Common Stock, or combining outstanding shares into a smaller number of shares (a reverse split). A Reorganization is frequently done when a company has already had a few rounds of venture financing but has not been able to successfully increase the value of the company and therefore is doing a Down Round that is essentially a restart of the company.

Round

Investors typically buy a series of Preferred Stock within a short time frame and frequently all at once. Each of these investment periods is a Round and will generally be associated with a specific security. For example, a "Series A Round" is when a company sells its Series A Preferred Stock. A Round may be open for a stated period of time to enable the company to accommodate investors who require additional time and investors who may want to put their money to work sooner.