Venture Trends on the East Coast (Q3 2008)

Justin Byers, Business Intelligence Analyst

Executive Summary

For companies seeking venture capital who are trying to decide whether the most investor friendly terms can be found on the East Coast or the West Coast, we have generated a very interesting and timely analysis that is just for you! Read the most recent Buzz for a comparison of terms from VC Experts’ early glimpse at an analysis of East Coast venture deal terms for Q3 2008 to Fenwick & West: Trends in Terms of Venture Financings in the San Francisco Bay Area (Q3 2008).

Fenwick & West, a national law firm that provides comprehensive legal services to technology and life sciences clients of national and international prominence, recently put out its Q3 2008 Bay Area venture deal terms report. In light of this, we have provided an early look at some of the analysis we have compiled thus far covering Q3 2008 East Coast venture deal terms. In this report, you will see terms for East Coast Area deals that are consistent with those in the Bay Area as well as some terms that differ from those in the Fenwick & West report.

What round series is this financing?	East Coast
	Q3 2008
Common Stock	0
Series A	35%
Series B	15%
Series C	20%
Series D or greater	30%

Starting with the “Series of Financing,” the biggest differences in the East Coast versus the Bay Area deals were in the Series A and Series B rounds with the East Coast seeing more A rounds but fewer B rounds as compared to 16% A rounds and 26% B rounds for the Bay Area.

How would you characterize this round of financing?	East Coast
	Q3 2008
Down Round	10%
Flat Round	10%
Up Round	60%
N/A*	20%

Next we will look at the direction of price changes. This was an area where the regions were very similar with Fenwick & West reporting 12% Down Round, 15% Flat Round and 73% Up Round for the Bay Area.

Is the liquidation preference for the current round senior, pari passu, etc?	East Coast
	Q3 2008
N/A	20%
Pari Passu	40%
Senior	40%

The liquidation preference for the East Coast was split evenly between pari passu and senior while 45% of the Bay Area financings were categorized as using senior liquidation preferences.

What is the multiple of the liquidation preference in this financing?	East Coast
	Q3 2008
1x	90%
>1x – 2x	5%
>2x – 3x	5%

Unlike the Bay Area where 50% of the financings used 1X – 2X multiples and 50% had 2X – 3X multiples, the East Coast showed a more prominent use of a 1x multiple liquidation preference.

If preferred stock, conventional convertible or participating preferred?	East Coast
	Q3 2008
Conventional Convertible	40%
Participating Preferred	60%

The type of preferred stock used (participating preferred versus conventional convertible) was about the same in each region with Fenwick & West’s analysis showing that 62% of Bay Area deals were participating preferred.

Were cumulative dividends present in this financing?	East Coast
	Q3 2008
No	45%
Yes	55%

One of the biggest differences in terms in these regions was the use of cumulative dividends. The Bay Area showed that cumulative dividends were only used in 4% of the deals. The East Coast deals split the use of cumulative dividends more evenly.

Select the anti-dilution protection proposed in this deal: weighted average or full ratchet?	East Coast
	Q3 2008
Full Ratchet	0%
Weighted Average	100%

Weighted average anti-dilution is still the more popular choice as compared to full ratchet. Seven percent of Bay Area financings included full ratchet provisions.

Were pay-to-play provisions present?	East Coast
	Q3 2008
Yes	10%
No	90%


If pay-to-play provisions were present, what were the penalties associated with the provision?
Conversion of Preferred Stock into Common Stock	5%
Conversion of Preferred Stock into Shadow Preferred Stock	5%

The use of pay-to-play provisions were very similar between the two regions. The Bay Area showed 12% of the deals using pay-to-play, where the East Coast showed the provisions being used in 10% of the deals.

Does this financing provide for redemption at the investor's option?	East Coast
	Q3 2008
No	30%
Yes	70%

Redemption was used in 23% of the Bay Area deals, and we found it used in 70% of the East Coast deals that we analyzed.

Did the financing involve a reorganization or recapitalization?	East Coast
	Q3 2008
No	100%

As far as corporate reorganization or recapitalization, we did not see this in any of the East Coast Deals that we analyzed compared to 4% of the Bay Area deals.

So where does all of this leave us? Based on this information above, the East Coast capital could be considered a little more “investor friendly” from the perspective that there are more cumulative dividends, and redemption seems to be more prominent; however, other than those terms, the remaining terms are fairly even in their use. Some shops are more comfortable with their terms, no matter where the location. The availability of the VC firms and startups in the Bay Area may also be a contributing factor. Will the Bay Area terms begin to change to more investor friendly terms? With the economy teetering on a fine line, more shops may buckle down on their terms to try to get the most out of their returns.

^* If N/A was used as indication for the "Round Direction" and/or the "Liquidation Preference for the Current Round", then this was due to there not being a previous round of financing for that particular company. If N/A was used for the "Type of Preferred Stock", then the preferred stock was not a "Conventional Convertible" or a "Participating Preferred".