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US Market Review and Outlook
Regional Market Review and Outlook
– California
– Mid-Atlantic
– New England
– Tri-State
Selected WilmerHale Venture Capital Financings
Law Firm Rankings—Eastern US
European Market Review and Outlook
Law Firm Rankings—Europe
When Should I Incorporate My Startup?
Trends in VC-Backed Company M&A Deal Terms
Trends in Convertible Debt Terms
Trends in Venture Capital Financing Terms
WilmerHale Launch: Position Your Startup for Success
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2015 Venture Capital Report – Table of Contents
REVIEW
In 2014, the venture capital market
produced its strongest performance—in
terms of both financing and liquidity
activity—since the end of the dot-com
boom. Deal flow approached its highest
level since 2000, total venture capital
financing proceeds soared to the second-
highest level in history, the median pre-
money valuation hit a record level,
the number of VC-backed US issuer IPOs
was the largest since 2000, and the median
acquisition price for VC-backed companies
was the highest since 2000. Both financing
and liquidity prospects appear favorable for
VC-backed companies in the coming year.
Equity Financing Activity
The number of reported venture capital
financing transactions dipped 4%, from
3,837 in 2013 to 3,682 in 2014—a decline
that is almost certain to be erased once all
2014 deals are accounted for. Despite the
normal lag in deal reporting, the tally for
2014 was the fourth-highest annual total
since the collapse of the dot-com bubble
in 2000. Once all 2014 deals are reported,
the year’s result is likely to end up as the
highest since the all-but-unapproachable
total of 6,448 financings in 2000. The
quarterly figures of 945, 995, 928 and
814 financings in 2014 are particularly
encouraging in light of delayed reporting
of some second-half transactions.
Total reported venture capital financing
proceeds leapt 47%, from $35.5 billion
in 2013 to $52.1 billion in 2014. The
2014 tally was the highest since 2000 and
63% higher than the average of $32.0
billion in total annual proceeds over the
preceding five years. The year’s total is
likely to increase further after all 2014
financings have been reported. The amount
of total proceeds in each of the four
quarters of 2014 represented the highest
quarterly total proceeds since 2000.
The median size of all venture capital
financings increased 34%, from $4.1 million
in 2013 to $5.5 million in 2014—the highest
figure since 2009. After declining over the
preceding five years, the median size of
first-round financings increased 19%, from
$2.6 million in 2013 to $3.1 million in 2014.
The general decline in the median size of
first-round financings in recent years has
been driven by reduced startup cash needs
for many companies due to technological
advances, as well as the desire of founders
to minimize dilution. The median size
of seed financings, which had fluctuated
between $600,000 and $800,000 since
2005, increased to $1.0 million in 2014.
The median size of second-round financings
increased 8%, from $6.0 million in 2013
to $6.5 million in 2014, but fell short of
the $8 million-plus figures that prevailed
between 2005 and 2008. The median
size of later-stage financings, which had
remained at the $10.0 million level for three
years, increased 30%, to $13.0 million
in 2014—the highest level since 2000.
The median financing size for life sciences
companies increased 25%, from $6.0
million in 2013 to $7.5 million in 2014,
matching the figure for 2008 and trailing
only 2007’s $8.5 million figure as the
sector’s highest median financing size
since 2005. For technology companies,
the median financing size increased
50%, from $3.2 million in 2013 to $4.8
million in 2014, reversing a five-year
decline but remaining significantly lower
than the median financing size during
the ten-year period preceding 2009. The
general decline in the median financing
size for technology companies in recent
years is at least partly attributable to
technological advances that have enabled
startups to commence and grow their
operations with a lower level of funding
than historically required—in many
cases, cloud computing and open-source
9.913.0
17.8
49.2
92.9
35.9
21.9 20.423.6 25.0
31.134.5 33.4
24.528.9
36.4 34.6 35.5
52.1
1,9122,212
2,588
4,645
6,448
3,381
2,5112,298 2,463 2,618
2,8593,110 3,100
2,7943,204
3,683 3,785 3,837 3,682
2014201320122011201020092008200720062005200420032002200120001999199819971996
2 US Market Review and Outlook
Source: Dow Jones VentureSource
# of deals $ in billions
US Venture Capital Financings – 1996 to 2014
Source: Dow Jones VentureSource
$ millionsLife Sciences Technology All Financings
Median Size of US Venture Capital Financings – 1996 to 2014
3.13.6
4.5
6.0
9.0
6.66.0 6.0
6.56.2
6.77.0
6.5
5.04.3
4.9
4.1 4.1
5.5
3.8 4.0
5.0
6.0
10.0
7.5
6.5 6.57.0 7.0
7.58.0
6.8
4.74.0
3.2 3.0 3.2
4.8
3.0
4.04.5
5.0
7.06.6
6.2
7.3 7.1
7.97.2
8.5
7.5
5.04.5
5.4 5.56.0
7.5
2014201320122011201020092008200720062005200420032002200120001999199819971996
software have replaced the need to purchase
expensive server racks, hire support staff
and acquire costly software licenses.
For the second consecutive year, the
number of very large financings increased
substantially. The number of financing
rounds of at least $50 million jumped 69%,
from 112 in 2013 to 189 in 2014, and the
number of financing rounds of at least
$100 million more than doubled from 28
to 62. These increases in super-sized rounds
are partly due to the growing participation
of private equity, crossover and hedge
funds in venture capital financing. The
largest venture financings of 2014 were
completed by Uber ($1.8 billion and a
separate financing for $1.2 billion), Magic
Leap ($542 million), Snapchat ($486
million) and Airbnb ($475 million).
The median pre-money valuation among
all venture financings doubled from
$20.0 million in 2013 to $40.0 million in
2014—an unprecedented year-over-year
increase. The 2014 figure even exceeded
the median pre-money valuations reached
at the peak of the dot-com boom. This
overall increase in 2014 was largely the
result of a sharp increase in valuations for
technology companies. The median pre-
money valuation in the technology sector
nearly quadrupled from $12.0 million in
2013 to $45.3 million in 2014, leapfrogging
the median pre-money valuation in the life
sciences sector after trailing valuations in
that sector for the past five years. Among
life sciences companies, the median pre-
money valuation declined 18%, from $37.0
million in 2013 to $30.5 million in 2014.
The number of reported seed and first-
round venture capital equity financings
declined, by 40% and 5% respectively,
from 2013 to 2014. Seed and first-round
financings accounted for 42% of all venture
financings in 2014—down from 47% in
each of the two preceding years. Proceeds
from seed and first-round equity financings
represented 15% of all venture capital
financing proceeds in 2014, down from
20% in 2013. The average percentage of
19% represented by seed and first-round
financings over the past five years is well
short of the 32% average recorded during
the 1996 to 2000 period. The decline in
early-stage equity financings in recent years
is partly attributable to the proliferation
of early-stage companies receiving smaller
financing amounts and surviving on
lower burn rates than historical norms.
The decline in early-stage equity financings
also reflects the growing influence of
angel and super-angel investors and their
preference for convertible debt financings,
in which the company issues notes to the
lenders-investors, with the notes converting
into equity upon the closing of a subsequent
financing, often at a discount and/or with
other inducements for the lenders-investors.
A variant on a convertible debt structure,
called a SAFE (Simple Agreement for Future
Equity) financing, has become particularly
popular on the West Coast. A SAFE
financing typically requires only one term
to be negotiated—the cap on the conversion
price—and only one legal document.
With 27% of all venture capital financing
transactions in 2014, the business and
financial services sector (which includes
a number of tech-based companies)
supplanted the technology sector for the
largest market share in 2014. The technology
sector accounted for 26% of the year’s
transactions in 2014, compared to 28%
in 2013. The market share for life sciences
companies was 20% in 2014, the same as in
2013, after declining in each of the preceding
three years. The consumer services sector
also had a 20% market share in 2014.
California—which has led the country
in financing activity in each year since
1996 (the first year for which this data
is available)—accounted for 44% of all
venture financing transactions in 2014
(1,615 financings) and 55% of all proceeds
3US Market Review and Outlook
Source: Dow Jones VentureSource
Source: Dow Jones VentureSource
Median Pre-Money Valuation in US Venture Capital Financings – 1996 to 2014
Life Sciences
Technology
Other TechCommunications & NetworkingSoftwareOther Life SciencesMedical DevicesBiopharmaceuticals
US Venture Capital Financings by Industry – 1996 to 2014
$ millionsLife Sciences Technology All Financings
1113
15
21
25
16
11 1012
1518 18
20 20 2022
25
20
40
1214
18
25
30
17
11 1012
15
1921
2422
18
2219
12
45
12 13 13 14
2018
14 15 1618 19
22
18
2320
29
25
37
31
2014201320122011201020092008200720062005200420032002200120001999199819971996
2014201320122011201020092008200720062005200420032002200120001999199819971996
566
1,327
536
1,265
495
1,076
2,235
3,489
1,3951,264 1,324 1,289
652856
649 599 560 589 664 715 756
1,922
1,269 1,152
748 7591,012
853 770944
7981,076
766
1,160
758
1,082
731966
($28.84 billion). New York, home to
companies with 368 financings raising
$4.64 billion in 2014, finished second
in deal flow for the third year in a row,
ahead of Massachusetts, which logged
283 financings raising $4.17 billion.
Texas (with 138 financings raising
$1.77 billion) and Washington (with 95
financings raising $1.09 billion) rounded
out the top five positions for 2014.
Liquidity Activity
With a boost from strong capital market
conditions, the number of venture-backed
US issuer IPOs increased 42%, from 72 in
2013 to 102 in 2014, continuing the recovery
that began in 2010 after VC-backed IPOs
had all but disappeared in 2008 and 2009.
The year’s tally represented the highest
number of VC-backed IPOs since 2000.
The largest VC-backed IPO of 2014 was the
$1.78 billion offering of JD.com, followed
by the IPOs of Mobileye ($890 million),
LendingClub ($870 million), King Digital
Entertainment ($500 million) and GoPro
($427 million). After decreasing from 7.3
years in 2012 to 6.8 years in 2013, the median
amount of time from initial funding to
an IPO inched up to 6.9 years in 2014.
In 2014, 63% of all VC-backed IPOs
were by life sciences companies, up from
51% in 2013, while the VC-backed IPO
market share for technology companies
decreased from 49% to 34%.
The median amount raised prior to an
IPO declined 11%, from $100.9 million
in 2013 to $89.6 million in 2014, and the
median pre-IPO valuation decreased 25%,
from $289.3 million to $216.7 million. As
a result, the ratio of pre-IPO valuations to
the median amount raised prior to an IPO
by venture-backed companies going public
fell for the third consecutive year, reaching
2.4:1 in 2014, compared to 2.9:1 in 2013 (a
lower ratio means lower returns to pre-IPO
investors). This ratio was between 3.2:1 and
5.5:1 for each year from 2001 to 2012, other
than a spike to 9.0:1 in 2009 based on a very
small sample size of VC-backed IPOs that
year. In contrast, this ratio ranged from 7.5:1
to 10.0:1 from 1997 to 2000, due to very large
pre-IPO valuations by younger companies.
Reversing a three-year decline, the M&A
market for venture-backed companies
expanded in 2014. The number of reported
acquisitions of VC-backed companies
increased 8%, from 449 in 2013 to 483 in
2014, while total proceeds nearly doubled,
increasing from $41.3 billion to $79.8
billion. Once all 2014 acquisitions are
accounted for, the improvement in 2014
deal activity should be even greater.
The median acquisition price for venture-
backed companies increased 25%, from
$50.0 million in 2013 to $75.0 million in
2014—the highest figure since 2000. After
posting consecutive annual increases from
2001 to 2007, followed by consecutive annual
declines through 2013, the median amount
of time from initial funding to acquisition
reversed course again, inching up from
5.0 years in 2013 to 5.1 years in 2014.
The median amount raised prior to
acquisition increased 28%, from $11.3
million in 2013 to $14.5 million in 2014.
The ratio of median acquisition price to
median amount raised prior to acquisition
increased from 4.4:1 in 2013 to 5.2:1 in 2014
(a higher ratio means higher returns to
pre-acquisition investors). This ratio in 2014
was the highest annual figure since the ratio
of 10.0:1 in 2000 at the apex of the dot-com
delirium. The increase in this ratio largely
stems from significantly higher acquisition
prices, coupled with only modest increases
in investment levels prior to acquisition.
The largest VC-backed company
acquisition of 2014 was Facebook’s
acquisition of WhatsApp for a stunning
$19 billion. There were a total of 23
VC-backed company acquisitions for
3.53.1
2.8 2.83.1
4.5
3.6
5.7 5.7 5.66.2
6.8
8.7
7.9 8.1
6.4
7.46.8 6.9211
120
73
261
201
25 20 23
6343 48
72
7 9
43 4251
72
102
2014201320122011201020092008200720062005200420032002200120001999199819971996
4 US Market Review and Outlook
Median Amount Raised Prior to IPO and Median Pre-IPO Valuation – 1996 to 2014Median pre-IPO valuation $ millionsMedian amount raised prior to IPO
Source: Dow Jones VentureSource and SEC filings The above chart is based on US IPOs by VC-backed US issuers.
Source: Dow Jones VentureSource
# of deals Median time from initial equity funding to IPO (in years)
Venture Capital–Backed IPOs and Median Time to IPO – 1996 to 2014
79105
172
314
351
253229 226 224
167202
307
238
383
295
457
362
289
217
15 13 22 3147 48 49 60 70
51 57 6549 43
71 83 78101 90
2014201320122011201020092008200720062005200420032002200120001999199819971996
at least $500 million in 2014, up from
nine in 2013. Billion-dollar acquisitions
of VC-backed companies increased to
nine in 2014, up from seven in 2013.
The above comparison of the ratios of
valuations to the financing amounts
required to achieve liquidity events
indicates that for only the second time
since 2000—but for the second consecutive
year—returns to venture capital investors
were higher in M&A transactions than
in IPOs in 2014. Furthermore, venture
investors generally achieve liquidity more
rapidly in an M&A transaction (which
frequently yields the bulk of the purchase
price in cash at closing) than in an IPO
(which generally involves a post-IPO
lockup period of 180 days and market
uncertainty on the timing and prices of
subsequent sales). When combined with
the shorter timeline from initial funding
to liquidity in 2014 for M&A transactions
(5.1 years) than IPOs (6.9 years), these data
points underscore why venture capitalists
often prefer a company sale to an IPO.
The ratio of M&A transactions to
IPOs for venture-backed companies
declined for the third consecutive year,
reaching 4.7:1 in 2014 compared to 6:2.1
in 2013. The 2014 ratio was the lowest
annual ratio since the 2.4:1 in 2000.
OUTLOOK
The overall performance of the venture
capital market in the coming year
will depend on a number of factors,
including general economic and capital
markets conditions and the amount
of fundraising by venture capital
funds. Subject to these uncertainties,
we offer the following insights:
■ Financing Activity: Venture capital financing activity should continue to be brisk in 2015. Valuations, however, seem ripe for some contraction in light of the lofty levels achieved in 2014. Early results in 2015 show a modest decline in deal flow compared to 2014, although a number of recent large financings demonstrate the market’s continued capacity for outsized rounds when warranted.
■ IPOs: On the heels of a very good IPO market for venture-backed companies
over the past five years, including an exceptionally strong year in 2014, expectations remain high for the IPO market in 2015. However, a number of attractive IPO candidates—including a growing number of “unicorns” valued in excess of $1 billion—appear to be biding their time before going public. The VC-backed company IPO market has begun 2015 at a more measured pace than in 2014, but various VC-backed companies are positioned to pursue large IPOs later this year if they so choose.
■ Acquisitions : Prospects for the M&A market for venture-backed companies appear promising. Strategic acquirers have excess cash to deploy, and the existence of a credible IPO alternative enhances the leverage of venture-backed companies in
negotiating acquisition prices. The start of 2015 has already seen several large acquisitions of VC-backed companies.
■ Attractive Sectors: Technology companies leveraging the massive adoption of smartphones and mobile applications and the ever-increasing level of broadband connectivity, as well as companies deploying SaaS models or focused on major business challenges such as cybersecurity, should continue to be prime targets for VC funding. Healthcare IT and life sciences companies with compelling market opportunities should also continue to attract funding, particularly as the high level of life sciences IPOs in 2014 produces investment returns that should help venture capital fundraising.<
5US Market Review and Outlook
Acquisitions of US Venture-Backed Companies and Median Time to M&A – 1996 to 2014
Median Amount Raised Prior to Acquisition and Median Acquisition Price – 1996 to 2014Median amount raised prior to acquisition Median acquisition price $ millions
Source: Dow Jones VentureSource
Source: Dow Jones VentureSource
# of deals Median time from initial equity funding to M&A (in years)
4.0
4.7
3.5
2.82.4
2.1
2.8
3.7
4.6
5.4
6.06.5
5.85.5 5.3 5.3 5.2 5.0 5.1
199232
284
348
489464
435399
529508
533 519
427409
563 552
473449
483
2014201320122011201020092008200720062005200420032002200120001999199819971996
4033 31
55
100
27
19 20
3035
46
58
3225
38
60
50 50
75
5.5 5.5 6.911.3 10.0
15.0 17.0 18.4 19.5 19.2 20.0 20.1 19.9 19.8 19.015.5 16.9
11.314.5
2014201320122011201020092008200720062005200420032002200120001999199819971996
CALIFORNIA
California companies reported 1,615 financings in 2014, up 3% from the 1,570 financings in 2013 and the highest annual total since the peak of the dot-com boom in 2000. Driven by a number of very large transactions, total proceeds surged 63%, from $17.67 billion to $28.84 billion. The financing and proceeds totals for 2014 are likely to be even more impressive after all deals have been reported.
Roughly four times the size of the next-largest venture capital market in the United States, California was responsible for 44% of the nation’s financing transactions in 2014. Accounting for 29% of all California financings in 2014, technology was the largest sector in the state, followed by business and financial services (27%), consumer services (23%) and life sciences (15%). California companies generated the two largest financing rounds in the country in 2014 ($1.8 billion and $1.2 billion, both by Uber), and eight of the ten largest rounds.
The number of IPOs by California-based VC-backed companies increased by one-third, from 33 in 2013 to 44 in 2014—representing 33% of all VC-backed IPOs in the nation. California was home to the two largest VC-backed IPOs by US-based issuers in 2014: LendingClub ($870 million) and GoPro ($427 million).
The number of reported acquisitions of California VC-backed companies increased 20%, from 213 in 2013 to 255 in 2014. California produced four of the five largest VC-backed company acquisitions of 2014, led by Facebook’s acquisition of WhatsApp for $19 billion—the most ever paid for a VC-backed company—followed by Google’s acquisition of Nest Labs for $3.2 billion and Apple’s acquisition of Beats Electronics for $2.5 billion.
California will undoubtedly maintain its venture capital leadership in the coming year. Future levels of venture capital financing and liquidity activity will depend, in part, on venture capital fundraising, the continued willingness of strategic buyers to pay attractive premiums, and the overall health of the capital markets.
65 7385
131
193 185
159149
168
142155
178
205
166
263
220239
213
255
82
4828
122
95
13 7 11
3414 16
29
3 219 22 27 33
44
2014201320122011201020092008200720062005200420032002200120001999199819971996
2014201320122011201020092008200720062005200420032002200120001999199819971996
244309
225 216 208 214 240 252 244 259
1,014
206
623
189
609
176
513
1,501
763
602 597649 640 654
561 535
237
486
207
398
206
494
246
584
252
514
238
470
4.075.86
7.31
22.63
39.30
14.76
9.728.48
10.20 10.74
13.8215.08 16.11
11.12
14.13
18.13 17.42 17.67
28.84
802940
1,116
1,993
2,553
1,202
960 9261,037
1,1341,254 1,287 1,347
1,161 1,243
1,5151,598 1,570 1,615
2014201320122011201020092008200720062005200420032002200120001999199819971996
6 Regional Market Review and Outlook
Source: Dow Jones VentureSource
# of deals $ in billions
California Venture Capital Financings – 1996 to 2014
# of IPOs # of acquisitions
California Venture-Backed IPOs and Acquisitions – 1996 to 2014
Source: Dow Jones VentureSource
Source: Dow Jones VentureSource
California Venture Capital Financings by Selected Industry – 1996 to 2014
Life Sciences
Technology
Other TechCommunications & NetworkingSoftwareOther Life SciencesMedical DevicesBiopharmaceuticals
MID-ATLANTIC
After experiencing strong growth in 2013, venture capital financing activity in the mid-Atlantic region of Virginia, Maryland, North Carolina, Delaware and the District of Columbia contracted slightly in 2014.
The number of reported venture capital financings in the region edged down 3%, from 172 in 2013 to 166 in 2014, although this decline should be erased after all transactions are reported. Total proceeds declined 37%, from $1.88 billion to $1.19 billion, as deal sizes in the region shrank. The region’s largest financings in 2014 were by Viamet Pharmaceuticals ($60 million) and Optoro ($50 million).
Accounting for 32% of all mid-Atlantic financings in 2014, business and financial services was the region’s largest sector, followed closely by technology (29%) and life sciences (26%).
After two consecutive annual increases, the number of VC-backed IPOs in the mid-Atlantic region dipped from seven in 2013 to six in 2014, the largest of which were by 2U ($119 million) and Opower ($116 million). Four of the region’s IPOs were in the life sciences sector, and the other two were by cloud-based software companies. North Carolina produced three IPOs, all by biopharmaceutical companies. Of the mid-Atlantic region’s remaining 2014 IPOs, two were from Maryland and one was from Virginia.
The number of reported acquisitions of mid-Atlantic VC-backed companies increased from 20 in 2013 to 22 in 2014—marking the second consecutive annual increase, but falling well short of the average of 37 over the 10-year period preceding 2012. The region’s largest M&A transaction of the year was the $200 million acquisition of Physical Graph by Samsung, followed by Good Technology’s acquisition of BoxTone ($164 million) and TiVo’s acquisition of Digitalsmiths ($135 million).
Coming off a relatively flat year, the mid-Atlantic region can be expected to see an increase in financing activity in 2015, led by life sciences companies, and some improvement in liquidity events.
0.62 0.79
1.39
3.02
6.32
2.67
1.69
1.081.43 1.31
1.79 1.71 1.84
1.081.48
2.03
0.99
1.88
1.19125
147185
310
517
237
190160 166 178 182 194
168147 163 167
138172 166
2014201320122011201020092008200720062005200420032002200120001999199819971996
2014201320122011201020092008200720062005200420032002200120001999199819971996
153
257
10289
75 80 81 87
65
120
88
55
90
48
76
4259
4154
4053 58 56 51 52 45
58 53 5039 42 41 41
5149 484344
7Regional Market Review and Outlook
Mid-Atlantic Venture Capital Financings by Selected Industry – 1996 to 2014
# of deals $ in billions
Mid-Atlantic Venture Capital Financings – 1996 to 2014
# of acquisitions# of IPOs
Mid-Atlantic Venture-Backed IPOs and Acquisitions – 1996 to 2014
Source: Dow Jones VentureSource
Source: Dow Jones VentureSource
Source: Dow Jones VentureSource
Life Sciences
Technology
Other TechCommunications & NetworkingSoftwareOther Life SciencesMedical DevicesBiopharmaceuticals
8
12
19
15
3936 37
32
42 42
3841
43
30
26
35
19 2022
118
4
1316
1 1 2 24
64
0 03
14
7 6
2014201320122011201020092008200720062005200420032002200120001999199819971996
NEW ENGLAND
New England companies reported 351 venture capital financings in 2014, down 13% from the 402 financings in 2013. Once all deal activity has been reported, the 2014 tally is likely to approach last year’s total, which was the state’s highest level of financing activity since 2001. As a result of larger transaction sizes, total proceeds increased 24%, from $3.93 billion to $4.87 billion—New England’s highest total since 2001. The region’s largest financings in 2014 came from Boston-Power ($250 million) and Intarcia Therapeutics ($200 million).
For the sixth consecutive year, the number of financings by life sciences companies in 2014 outpaced the number of financings by technology companies. The life sciences sector accounted for 37% of New England’s venture capital financings, followed by technology (27%), business and financial services (25%) and consumer services (14%).
New England generated 25 venture-backed IPOs in 2014, a nearly three-fold increase from 2013 and the region’s highest annual count since 2000. Massachusetts accounted for 22 of the region’s IPOs—a whopping 77% of them by life sciences companies—and Connecticut contributed the remaining three. However, the region’s largest VC-backed IPOs were by a pair of technology companies, Wayfair ($319 million) and HubSpot ($125 million).
The number of reported acquisitions of VC-backed companies in New England soared from 38 in 2013 to 60 in 2014, exactly reversing the prior year’s decline. The region’s largest M&A transaction of the year was the $1 billion acquisition of Dealer.com by Dealertrack, followed by WEX’s acquisition of Evolution1 ($533 million).
With its concentration of world-renowned universities and research institutions, New England—and Massachusetts in particular—should remain one of the country’s most appealing environments for emerging companies and a hub of venture capital and IPO activity during 2015, particularly in the life sciences and technology sectors.
8 Regional Market Review and Outlook
# of IPOs # of acquisitions
New England Venture-Backed IPOs and Acquisitions – 1996 to 2014
Source: Dow Jones VentureSource
Source: Dow Jones VentureSource
# of deals $ in billions
New England Venture Capital Financings – 1996 to 2014
Source: Dow Jones VentureSource
New England Venture Capital Financings by Selected Industry – 1996 to 2014
Life Sciences
Technology
Other TechCommunications & NetworkingSoftwareOther Life SciencesMedical DevicesBiopharmaceuticals
3530
37
51
69
62
54
40
61
7275
67
5147
71 71
60
38
60
37
16
6
27 25
1 03
7 8 6
18
0 2 3 47 9
2014201320122011201020092008200720062005200420032002200120001999199819971996
25
2014201320122011201020092008200720062005200420032002200120001999199819971996
338
476
278
214 203 199175 170 156
181
102
215
94
179
84
160
80
128103
86 10083
116 110132
107119 110127 121 119129 123
96131127
95115
1.49 1.552.28
5.77
12.03
5.11
3.19 3.24 3.16 3.103.48
3.943.56
3.08 2.79
3.83 3.56
4.87
281 307
400
626
837
490
367 357 352 340 366398 386
345376 382 374
402351
2014201320122011201020092008200720062005200420032002200120001999199819971996
3.93
TRI-STATE
The number of reported venture capital financings in the tri-state region of New York, New Jersey and Pennsylvania declined 10%, from 522 in 2013 to 472 in 2014, although the gap should narrow once all transactions are reported. Total proceeds in the region jumped 49%, from $3.89 billion to $5.80 billion—the region’s highest tally since 2000.
New York led the tri-state region with 368 financings in 2014, down modestly from 390 in 2013, but topped Massachusetts for the third consecutive year as the nation’s second-largest source of VC financings. Total proceeds in New York, which have increased 127% over the past two years, surpassed Massachusetts for the first time in 2014.
Consumer services companies accounted for the largest share of the tri-state region’s VC financing activity in 2014, with 33% of all financings, followed by technology companies with 23%. Life sciences companies contributed 17% of the region’s financings.
The number of VC-backed IPOs in the tri-state region increased from nine in 2013 to 12 in 2014, representing the region’s highest annual total since 2000. New York, New Jersey and Pennsylvania each produced four IPOs. The region’s largest VC-backed IPOs were by On Deck Capital ($200 million), Varonis Systems ($106 million) and Everyday Health ($100 million).
Reported acquisitions of venture-backed companies in the tri-state region declined 31%, from 81 in 2013 to 56 in 2014—the lowest level since 2010. The region’s largest deal of 2014 was the $420 million acquisition of Tri-Northern Security Distribution by Anixter International, followed by M/A-COM Technology’s acquisition of BinOptics ($230 million) and Rocket Fuel’s acquisition of XPlusOne (also $230 million).
With strength across a broad array of industry sectors, the tri-state region can be expected to experience an increase in financing activity over the coming year. The region may have difficulty matching its 2014 level of IPO activity in 2015, but M&A deal flow can be expected to return to more normal levels.<
2014201320122011201020092008200720062005200420032002200120001999199819971996
54
90
55
92
4165
169
335
219
117 107 117 107125
106112
71
99 9066 70
81 77102
82105 102
89 9377
10589
131 132
90110
79100
9Regional Market Review and Outlook
Tri-State Venture Capital Financings by Selected Industry – 1996 to 2014
# of deals $ in billions
Tri-State Venture Capital Financings – 1996 to 2014
# of acquisitions# of IPOs
Tri-State Venture-Backed IPOs and Acquisitions – 1996 to 2014
Source: Dow Jones VentureSource
Source: Dow Jones VentureSource
Source: Dow Jones VentureSource
Life Sciences
Technology
Other TechCommunications & NetworkingSoftwareOther Life SciencesMedical DevicesBiopharmaceuticals
25 2320
30
40
48
4238
48
55 54
61
48
42
54
79 79 81
56
20
9 8
38
15
25
1
95
106
1 1
8
1
7 912
2014201320122011201020092008200720062005200420032002200120001999199819971996
0.711.09
2.00
5.23
10.68
4.31
1.872.69 2.65
3.07
3.983.17 2.96
2.41
3.313.80
3.023.89
5.80
143
208234
495
777
465
272 259283
259
350387 379 373
479 466 474522
472
2014201320122011201020092008200720062005200420032002200120001999199819971996
Counsel of Choice for Venture Capital Financings serving industry leaders in technology, life sciences, energy and cleantech, financial services, communications and beyond
$33,000,000Late Stage
October 2014
$10,000,000Second Round
December 2014
$20,000,000Second Round
June 2014
$53,000,000Second Round
October 2014
$30,000,000Second Round
May 2014
$72,800,000Second Round
May 2014
$25,000,000Third Round
October 2014
$17,000,000First Round
February 2014
$15,500,000Fourth Round
March 2015
$10,000,000Second Round
July 2014
$13,500,000Second Round
July 2014
$100,000,000Fourth Round
March 2014
$34,000,000Fourth Round
June 2014
$5,000,000First Round
September 2014
$22,000,000Third Round
January 2015
$29,000,000Late Stage
December 2014
$11,100,000Second Round
January 2015
$28,000,000First Round
September 2014
$26,000,000Second Round
May 2014
£15,000,000Late Stage
January 2014
$60,000,000Fourth Round
March 2014
$60,000,000Fourth Round
October 2014
$70,000,000Fourth Round
January 2015
$27,700,000Fourth Round
October 2014
$42,000,000Third Round
December 2014
£6,100,000Late Stage
June 2014
$16,800,000Second Round
December 2014
$26,600,000Fourth Round
December 2014
$25,000,000First Round
December 2014
$40,000,000Second Round
June 2014
136
101
88
77
51
44
39
29
29
25
24
21
21
21
20
Wilmer Cutler Pickering Hale and Dorr LLP
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
Cooley LLP
Goodwin Procter LLP
DLA Piper LLP
Morgan, Lewis & Bockius LLP
Wilson Sonsini Goodrich & Rosati, P.C.
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
Pepper Hamilton LLP
Nelson Mullins Riley & Scarborough LLP
Morse, Barnes-Brown & Pendleton, PC
Foley & Lardner LLP
Morris, Manning & Martin, LLP
Wyrick Robbins Yates & Ponton LLP
Foley Hoag LLP
12 Law Firm Rankings – Eastern US
The above chart is based on VC-backed companies located east of the Mississippi River that were private and independent as of the end of 2014.Source: Dow Jones VentureSource
Counsel to Eastern US Technology and Life Sciences Companies Receiving VC Financing – 2008 to 2014
Counsel to Eastern US VC-Backed Technology and Life Sciences Companies at Year-End 2014
Wilmer Cutler Pickering Hale and Dorr LLP
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
Cooley LLP
Goodwin Procter LLP
DLA Piper LLP
Morgan, Lewis & Bockius LLP
Wilson Sonsini Goodrich & Rosati, P.C.
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
Morris, Manning & Martin, LLP
Pepper Hamilton LLP
Morse, Barnes-Brown & Pendleton, PC
Nelson Mullins Riley & Scarborough LLP
Foley Hoag LLP
Foley & Lardner LLP
Wyrick Robbins Yates & Ponton LLP
The above chart is based on companies located east of the Mississippi River that completed a seed, first, second, later-stage or restart round of venture capital financing between 2008 and 2014.Source: Dow Jones VentureSource
36
29
26
30
16
10
13
10
3
5
1
10
5
6
1
141
106
88
60
32
35
31
25
24
22
25
16
19
12
16
1
1
177
135
114
90
48
45
44
35
27
27
26
26
24
18
17
2008-2013 2014
The above chart is based on VC-backed companies located east of the Mississippi River.Source: Dow Jones VentureSource and SEC filings
Wilmer Cutler Pickering Hale and Dorr LLP
Goodwin Procter LLP
Morgan, Lewis & Bockius LLP
Cooley LLP
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
DLA Piper LLP
Latham & Watkins LLP
Wilson Sonsini Goodrich & Rosati, P.C.
Edwards Wildman Palmer LLP
Foley Hoag LLP
Hogan Lovells US LLP
Ropes & Gray LLP
Skadden, Arps, Slate, Meagher & Flom LLP
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
Nixon Peabody LLP
Morris, Manning & Martin, LLP
212
122
98
98
74
68
60
58
58
47
46
46
43
30
29
Wilmer Cutler Pickering Hale and Dorr LLP
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
Cooley LLP
Goodwin Procter LLP
Morgan, Lewis & Bockius LLP
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
Morris, Manning & Martin, LLP
DLA Piper LLP
Wilson Sonsini Goodrich & Rosati, P.C.
Ropes & Gray LLP
Edwards Wildman Palmer LLP
Foley Hoag LLP
Nixon Peabody LLP
Hutchison PLLC
Hogan Lovells US LLP
13Law Firm Rankings – Eastern US
The above chart is based on VC-backed companies located east of the Mississippi River.Source: Dow Jones VentureSource
Company Counsel in Eastern US VC-Backed IPOs – 1996 to 2014
Counsel in Sales of Eastern US VC-Backed Companies – 1996 to 2014
82
33
30
19
14
13
13
13
12
12
11
10
10
9
8
7
REVIEW
The European venture capital market produced strong results in 2014, particularly as measured by financing proceeds and liquidity events.
The number of reported venture capital financings in Europe declined 11%, from 1,636 in 2013 to 1,460 in 2014, but this decline is likely to be erased once all transactions have been reported. Gross proceeds increased 25%, from E6.29 billion to E7.89 billion—the highest annual gross proceeds since the E10.88 billion in 2001.
In 2014, consumer information services companies represented 30% of all European venture capital financings and 29% of gross proceeds, followed by business support services companies (28% of financings and 31% of proceeds) and technology companies (18% of financings and 12% of proceeds). With a larger median financing size, companies in the life sciences sector produced 22% of the year’s proceeds, while accounting for only 15% of all financings.
The United Kingdom generated 25% of Europe’s venture capital financings and 26% of all gross proceeds in 2014, while Germany produced 16% of the financings and 27% of the proceeds. France followed with 17% of the year’s financings and 12% of all proceeds.
The number of IPOs by European venture-backed companies more than tripled, from 18 in 2013 to 55 in 2014—the highest annual tally since the 97 in 2006. Acquisitions of European VC-backed companies increased 21%, from 166 to 201, but M&A activity remained 30% below the level that prevailed from 2004 to 2008.
OUTLOOK
With an increasingly globalized Internet and the cost of starting new companies at historically low levels, new business formation remains brisk. The sharp increase in VC-backed IPOs in 2014 should improve investment returns and make it easier for venture capital firms to raise new funds. Together, these factors bode well for an increase in European venture capital activity in 2015, despite continuing economic challenges. <
22.3
10.9
5.23.7 4.1 4.4
5.26.3
5.54.1
5.4 5.3 5.06.3
7.9
4,045
2,806
1,8171,537 1,473 1,484 1,429
1,7001,502
1,314 1,431 1,379 1,4211,636
1,460
201420132012201120102009200820072006200520042003200220012000
201420132012201120102009200820072006200520042003200220012000
489354
255 260220349
239333288
384326382
297
461363
587
375
557
374
668
395
708
394
734
377
938
374
1,444
443
1,892
14 European Market Review and Outlook
Source: Dow Jones VentureSource
# of deals $ in billions
European Venture Capital Financings – 2000 to 2014
Source: Dow Jones VentureSource
Other TechCommunications & NetworkingSoftwareOther Life SciencesMedical DevicesBiopharmaceuticals
European Venture Capital Financings by Selected Industry – 2000 to 2014
Technology
Life Sciences
# of IPOs # of acquisitions
European Venture-Backed IPOs and Acquisitions – 2000 to 2014
Source: Dow Jones VentureSource
Taylor Wessing LLP
Wilmer Cutler Pickering Hale and Dorr LLP
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
Taylor Vinters LLP
Vinge
Eversheds LLP
Fidal
Jones Day
Osborne Clarke
Ernst & Young Legal
CMS Hasche Sigle
Landwell
Lindahl
Pinot de Villechenon & Associés
Baker & McKenzie LLP
DLA Piper LLP
Taylor Wessing LLP
Wilmer Cutler Pickering Hale and Dorr LLP
Fidal Legal
Eversheds LLP
Ernst & Young Legal
Vinge
Osborne Clarke
Gordons Partnership LLP
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
Baker & McKenzie LLP
CMS Hasche Sigle
Taylor Vinters LLP
DLA Piper LLP
Landwell
Matheson
134
179 175189
295284
293 288
255
210230 225
175166
201204
4122
9
5571
97
46
123
18 16 16 18
55
201420132012201120102009200820072006200520042003200220012000
26
25
18
14
14
12
12
11
10
9
8
7
7
7
6
6
15Law Firm Rankings – Europe
Counsel to European Technology and Life Sciences Companies Receiving VC Financing – 2008 to 2014
The above chart is based on European companies that completed a seed, first, second, later-stage or restart round of venture capital financing between 2008 and 2014.Source: Dow Jones VentureSource
Taylor Wessing LLP
Wilmer Cutler Pickering Hale and Dorr LLP
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
Taylor Vinters LLP
Vinge
Eversheds LLP
Fidal
Jones Day
Osborne Clarke
Ernst & Young Legal
CMS Hasche Sigle
Landwell
Lindahl
Pinot de Villechenon & Associés
Baker & McKenzie LLP
DLA Piper LLP
Counsel to European VC-Backed Technology and Life Sciences Companies at Year-End 2014
Taylor Wessing LLP
Wilmer Cutler Pickering Hale and Dorr LLP
Fidal Legal
Eversheds LLP
Ernst & Young Legal
Vinge
Osborne Clarke
Gordons Partnership LLP
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
Baker & McKenzie LLP
CMS Hasche Sigle
Taylor Vinters LLP
DLA Piper LLP
Landwell
Matheson
The above chart is based on European VC-backed companies that were private and independent as of the end of 2014.Source: Dow Jones VentureSource
28
20
19
18
17
16
14
13
13
12
12
12
11
11
11
16 When Should I Incorporate My Startup?
If you are reading this, odds are you think of yourself as the
founder of a startup. And if you are the founder of a startup, odds are it is time for you to incorporate your company.
WHY SHOULD I INCORPORATE MY STARTUP?
The most important benefit of incorporation is limitation of liability. If a third party sues your business, that third party can only reach the assets of the entity that you’ve incorporated. Assuming you’ve complied with corporate laws related to the corporate entity, the third party cannot successfully recover from your personal assets, such as your house, your bank account or your dog. The protection of limited liability is particularly useful if your company is actually working with third parties—hiring employees, leasing space or contracting with suppliers.
There are other benefits of incorporating a company. First, when you incorporate your company, you issue stock to the founders and possibly others who have a relationship with the company, such as early-stage employees. This exercise legally determines the company’s owners. If it’s just you, easy. If it’s you and a few friends or colleagues who’ve been helping you out, the process of incorporating and issuing stock will make it very clear who owns what, and any back-of-the-napkin or late-night discussions regarding allocation of ownership should be resolved at the time of incorporation.
Having a clear and tidy capitalization structure is beneficial, both because it can save heartache and avert acrimony between founders who were not on the same page, and because investors may be discouraged from investing in a company that has a complicated cap table or a dispute about stock ownership. Also, it often makes sense to incorporate your business and issue shares to the founders sooner rather than later, when the value is low and shares can be issued to founders at a low price and without incurring hefty tax if the founders accept stock as compensation without paying for it.
Becoming a corporation also allows you to compensate your service providers
with something other than cash (which, for many startups, is in short supply): stock options! Grants of stock options are a valuable tool to attract and incent employees and advisors.
Because a corporation has a legal identity distinct from its founders and stockholders, incorporation also creates a place to “store” the company’s intellectual property (IP), even if the IP was developed collectively by multiple people. Once your company is incorporated, all IP related to the business of the company should be owned by the corporation, not by the individual founders or others who developed the IP. Each founder and any consultant should assign all rights to any IP created for the company to the corporation. That way, if a member of the founding team or a consultant walks away, your company’s inventions do not legally travel with the departing person. Potential investors and acquirers will lose interest in the company if they are not comfortable that the intellectual property is legally owned by the entity.
WHAT ARE THE DOWNSIDES OF INCORPORATING MY STARTUP?
Now, you may be thinking: “Yes. I have an idea; I might even have co-founders; there is valuable IP involved. We are serious about this business and we want to move forward. Why wouldn’t we incorporate?”
Here are two reasons: It may be that you need to continue to develop your initial science or technology, or refine your business plan, before jumping in full-time. Or you may still be hammering out exactly what the respective roles of the co-founders will be going forward. If this sounds like you, take the time you need.
You also should consider the expense of incorporating your company, including the costs associated with preparing and filing your company’s certificate of incorporation, qualifying your company to do business in the state in which it is located (if different than the state of incorporation) and annual franchise taxes (which generally vary based on your company’s outstanding stock and assets).
SHOULD I TALK TO MY EMPLOYER BEFORE INCORPORATING?
If you are currently employed, or you were employed when you developed the IP that is going to serve as the foundation of your company, you should consider the rights the employer may have in the IP. Most employers have a policy that says inventions or discoveries that you make while you are their employee belong to them and not to you, although these policies often except inventions you created on your own time and without use of your employer’s facilities or resources. If this is not the situation, and if you want the IP to belong to your company, you will need to ask your employer.
In the case of a life sciences startup based on inventions from your lab at a university, you will need the cooperation of the university to legally transfer the applicable patent to your company. Sometimes, the university may not be eager to transfer or license the patent to your company, and your best option may be to team up with the university to commercialize the patent, rather than trying to extract it from the university. Alternatively, the university may see little to no commercial value in a patent and decide that it no longer wants to bear the cost of maintaining that patent; in that case, you may have the opportunity to assume the obligation to pay the cost of maintaining the patent in exchange for the right to develop and commercialize the patent. Of course, there are many potential outcomes in between these two poles.
The bottom line: If your employer has rights in the IP that will serve as the foundation of your company’s efforts, there is no need to form a corporation until you and your employer come to an understanding with respect to the IP. Incorporation can wait.
CONCLUSION
Incorporation offers important advantages
and is necessary if you are going to
accept funding and grow your startup for
eventual sale or IPO. Once your technology
and team are in place, incorporation is
the next logical step for your startup.
It’s time to launch your company! <
Trends in VC-Backed Company M&A Deal Terms 17
We reviewed all merger transactions between 2008 and 2014 involving venture-backed targets (as reported in Dow Jones VentureSource) in which the merger documentation was publicly available and the deal value was $25 million or more. Based on this review, we have compiled the following deal data:
1 The buyer provided indemnification in 50% of the 2008 transactions, 40% of the 2009 transactions, 80% of the 2010 transactions, 29% of the 2011 transactions, 57% of the 2012 transactions, 55% of the 2013 transactions, and 53% of the 2014 transactions where buyer stock was used as consideration. In 25% of the 2008 transactions, 40% of the 2009 transactions, 33% of the 2010 transactions, 23% of the 2011 transactions, 25% of the 2012 transactions, 50% of the 2013 transactions, and 44% of the 2014 transactions where the buyer provided indemnification, buyer stock was used as consideration.
2 Measured for representations and warranties generally; specified representations and warranties may survive longer.3 In one case, representations and warranties did not survive.4 In one case, general representations and warranties did not survive, but certain “fundamental” representations and warranties did survive.5 Generally, exceptions were for fraud, willful misrepresentation and certain “fundamental” representations commonly including capitalization, authority and validity. In a limited number of transactions, exceptions also included intellectual property representations.6 One of two transactions not including an escrow at closing did require funding of escrow with proceeds of earnout payments.7 Excludes one transaction with an escrow of 0.75% which also specifically referred to representation and warranty insurance as recourse for the buyer.8 Generally, exceptions were for fraud, willful misrepresentation and certain “fundamental” representations commonly including capitalization, authority and validity. In a limited number of transactions, exceptions also included intellectual property representations.9 A “hybrid” approach with both a deductible and a threshold was used in another 4% of these transactions in 2008, 2% of these transactions in 2011, 8% of these transactions in 2012, and 8% of these transactions in 2013. Another 4% of these transactions had no deductible or threshold. In 60% of these transactions in 2008, 100% of these transactions in 2009, 67% of these transactions in 2010, 86% of these transactions in 2011, 100% of these transactions in 2012, 100% of these transactions in 2013, and 86% of these transactions in 2014, buyer stock was used as consideration. Generally, exceptions were for general economic and industry conditions. Excludes one transaction where the specified exceptions do not apply for purposes of a standalone “material adverse effect” closing condition. Includes one transaction where the specified exceptions apply for purposes of a standalone “material adverse effect” closing condition and certain representations, but do not apply for purposes of other representations. The only transaction not including such exceptions provided for a closing on the same day the definitive agreement was signed.
10
11
12
13
14
15
Characteristics of Deals Reviewed 2008 2009 2010 2011 2012 2013 2014
Sample Size
Cash
Stock
Cash and Stock
25
76%
4%
20%
15
60%
0%
40%
17
71%
6%
23%
51
73%
4%
23%
26
73%
8%
19%
27
59%
8%
33%
37
59%
3%
38%
Deals with Earnout 2008 2009 2010 2011 2012 2013 2014
With Earnout
Without Earnout
12%
88%
27%
73%
29%
71%
29%
71%
31%
69%
33%
67%
30%
70%
Deals with Indemnification 2008 2009 2010 2011 2012 2013 2014
With IndemnificationBy Target’s Shareholders By Buyer1
96% 48%
100% 36%
100%17%
98%43%
100%62%
100%44%
97%49%
Survival of Representations and Warranties2 2008 2009 2010 2011 2012 2013 2014
Shortest
Longest
Most Frequent
12 Months
24 Months
12 Months
6 Months
18 Months
18 Months
9 Months
21 Months
18 Months
12 Months3
24 Months
18 Months
10 Months
24 Months
18 Months
12 Months
30 Months
18 Months
12 Months4
24 Months
12 and 18 Months (tie)
Caps on Indemnification Obligations 2008 2009 2010 2011 2012 2013 2014
With CapLimited to Escrow Limited to Purchase Price Exceptions to Limits5
Without Cap
95% 81% 14% 62%
5%
100% 71% 0% 71%
0%
100% 71% 6%
94%
0%
100% 77% 2%
96%
0%
100% 81% 0%
96%
0%
100% 88% 0%
100%
0%
100% 89% 0%
100%
0%
Escrows 2008 2009 2010 2011 2012 2013 2014
With Escrow% of Deal Value
Lowest Highest Most Frequent
Length of TimeShortest Longest Most Frequent
Exclusive RemedyExceptions to Escrow Limit Where Escrow Was Exclusive Remedy8
96%
3% 15% 10%
12 Months 36 Months 12 Months
83% 85%
93%
10% 15% 10%
12 Months 18 Months
12 and 18 Months (tie)46% 83%
100%
2%25%10%
9 Months36 Months18 Months
53%80%
94%
5%31%10%
12 Months36 Months18 Months
78%97%
100%
5%16%10%
10 Months48 Months12 Months
73%100%
93%6
5%20%10%
12 Months30 Months18 Months
60%100%
97%
2% 7
16%10%
12 Months24 Months12 Months
86%100%
Baskets for Indemnification 2008 2009 2010 2011 2012 2013 2014
Deductible9
Threshold9
43%10
48%10
43%
57%
56%
44%
38%
60%
27%
65%
50%
42%
44%
56%
MAE Closing Condition 2008 2009 2010 2011 2012 2013 2014
Condition in Favor of Buyer
Condition in Favor of Target11
88%
21%
100%
20%
100%
19%
98%
15%
95%
9%
100%
17%
97%
19%
Exceptions to MAE 2008 2009 2010 2011 2012 2013 2014
With Exception12 92% 93% 94% 94%13 84%14 96%15 100%
18
Based on more than 100 convertible debt financing transactions we handled in 2013 and 2014 for companies and investors throughout the United States, we have compiled the following deal data:
Trends in Convertible Debt Terms
Deals with Note Purchase Agreement 2013 2014
Convertible note investors often require the company to enter into a note purchase agreement
containing representations and warranties from the company (and possibly the founders).
% of Deals 65% 64%
Term 2013 2014
The term of the convertible note before it becomes due and payable. MedianRange
15 months
1 month–48 months
18 months
1 month–72 months
Interest Rate 2013 2014
The rate at which interest accrues during the term of the convertible note. MedianRange
6% 0.25%–20%
6% 0.33%–15%
Deals with Security Interest 2013 2014
Convertible note investors sometimes require the company to provide a security
interest in some or all of the company’s assets. If the note is not repaid or converted
into capital stock, the pledged assets would become available to satisfy the note.
% Secured
% Unsecured
25%
75%
20%
80%
Deals with Conversion Discount 2013 2014
Convertible note investors often require that the notes convert in connection with
a financing at a discount from the price paid by new investors in the financing to
reward the convertible note investors for the risk of investing before the new
investors. A conversion discount is often coupled with a cap on the valuation at which
the notes convert.
% of Deals
Range of Discounts
% with 20% or Less Discount
% with Greater Than 20% Discount
% with Valuation Cap
66%
10%–50%
71%
29%
67%
72%
10%–50%
76%
24%
74%
Deals with Conversion upon Maturity 2013 2014
If a convertible note is not converted or otherwise paid upon maturity, it often
converts into shares of the company’s capital stock (common or preferred stock).
This conversion is most often at the election of the investor but may be mandatory.
% of Deals
% with Optional Conversion
% with Mandatory Conversion
% that Convert into:CommonPreferred
59%
80%
20%
31%69%
57%
90%
10%
54%46%
Deals with Conversion upon Company Sale 2013 2014
If a convertible note is not converted or otherwise paid at the time of
a sale of the company, it often converts into shares of the company’s
capital stock (common or preferred stock). This conversion is most
often at the election of the investor but may be mandatory.
% of Deals
% with Optional Conversion
% with Mandatory Conversion
% that Convert into:CommonPreferred
66%
95%
5%
55%45%
66%
86%
14%
60%40%
Deals with Conversion Premium upon Company Sale 2013 2014
Convertible note investors may require that they receive a multiple of the
outstanding principal of the convertible note upon a sale of the company.
% of Deals
Median Premium
Range of Premiums
51%
2x
2x–4x
52%
2x
1.5x–3x
Deals with Warrant Coverage 2013 2014
Convertible note investors sometimes receive a warrant in addition to a note. The amount
of company stock covered by the warrant is usually proportional to the principal amount
of the note, referred to as the warrant coverage. For example, if the investor is funding
$100,000 and the warrant coverage is 10%, then the number of shares of stock for which
the warrant is exercisable would equal $10,000 divided by the warrant exercise price.
% of Deals
Coverage Range
% that Cover Common
% that Cover Preferred
5%
4%–25%
0%
100%
11%
1%–50%
20%
80%
19
Based on hundreds of venture capital financing transactions we handled from 2010 to 2014 for companies and venture capitalists in the United States and Europe, we have compiled the following deal data:
Trends in Venture Capital Financing Terms
Deals with Multiple Liquidation Preferences 2010 2010 Range 2011 2011 Range 2012 2012 Range 2013 2013 Range 2014 2014 Range
A “multiple liquidation preference” is
a provision that provides that the holders
of preferred stock are entitled to receive
more than 1x their money back before
the proceeds of the liquidation or sale are
distributed to holders of common stock.
Series A
Post–Series A
4% 2x
10% 1.5x–2x
7% 1.2x–3x
4% 1.3x–1.5x
0% N/A
7% 2x –2.4x
5% 2x–3x
9% 1.5x–2.17x
0% N/A
3% 1.5x (all)
Deals with Participating Preferred Stock 2010 2010 Range 2011 2011 Range 2012 2012 Range 2013 2013 Range 2014 2014 Range
“Participating preferred” stock entitles
the holder not only to receive its stated
liquidation preference, but also to receive
a pro-rata share (assuming conversion
of the preferred stock into common stock)
of any remaining proceeds available for
distribution to holders of common stock.
Series A Total
Capped
Post–Series A Total
Capped
33% 18% 2x–3x
44% 45% 1.6x–5.5x
24% 45% 2x–3x
34% 30% 1.75x–8x
15% 43% 2x–10x
27% 44% 2x–3x
8% 50% 2x–3x
24% 41% 2x–5x
12% 40% 3x–5x
19% 45% 2x–5x
Deals with an Accruing Dividend 2010 2011 2012 2013 2014
“Accruing dividends” are generally
payable upon liquidation or redemption
of the preferred stock. Because the sale
of the company is generally deemed to
be a “liquidation,” the accrued dividend
effectively increases the liquidation
preference of the preferred stock.
Series A
Post–Series A
23%
30%
18%
43%
29%
28%
9%
11%
11%
22%
Anti-Dilution Provisions 2010 2011 2012 2013 2014
A “full ratchet” anti-dilution formula
is more favorable to the investors because
it provides that the conversion price of the
preferred stock will be reduced to the price
paid in the dilutive issuance, regardless
of how many shares are involved in the
dilutive issuance. In contrast, a “weighted
average” anti-dilution formula takes into
account the dilutive impact of the dilutive
issuance based upon factors such as the
number of shares and the price involved
in the dilutive issuance and the number
of shares outstanding before and after
the dilutive issuance.
Series A
Full Ratchet Weighted Average
Post–Series A
Full Ratchet Weighted Average
0% 100%
4% 96%
2% 98%
3% 97%
0% 100%
3% 97%
0% 100%
1% 99%
0% 100%
1% 99%
Deals with Pay-to-Play Provisions 2010 2011 2012 2013 2014
“Pay-to-play” provisions provide an
incentive to investors to invest in future
down rounds of financing. Investors that
do not purchase their full pro-rata share
in a future down round lose certain rights
(e.g., their anti-dilution rights are taken
away or their shares of preferred stock
may be converted into common stock).
Total
% of Total that Convert into Common Stock
% of Total that Convert into Shadow
Preferred Stock
20%
100%
0%
19%
82%
18%
7%
100%
0%
7%
100%
0%
8%
53%
47%
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Want to know more about the IPO and M&A markets?Our 2015 IPO Report offers a detailed analysis of, and outlook for, the IPO market. The report features regional breakdowns, useful IPO market metrics, an update on the rates of adoption of various elements of JOBS Act relief available to emerging growth companies, and helpful tips on how to keep your directed share program company-friendly. We examine the pros and cons of employee stock purchase plans; review various SEC, stock exchange and other considerations around director independence; address key areas of regulatory diligence for companies going public; and offer a helpful walk-through of the process of SEC review of Form S-1 registration statements in the lead-up to an IPO.
See our 2015 M&A Report for a detailed review of, and outlook for, the global M&A market. Other highlights include a comparison of deal terms in public and private acquisitions, updates on takeover defenses and the current climate around proxy access, and a look at the use of social media by public companies and activist shareholders in contested situations. We also examine recent trends in merger control, discuss lessons from Cigna v. Audax for sales of VC-backed companies structured as mergers, address the challenges posed by pre-IPO acquisitions, and survey key terms in sales of VC-backed companies.
To request a copy of any of the reports described above, or to obtain additional copies of the 2015 VC Report, please contact the WilmerHale Client Development Department at [email protected] or call +1 617 526 5600. An electronic copy of this report can be found at www.wilmerhale.com/2015VCreport.
Data Sources: WilmerHale compiled all data in this report from Dow Jones VentureSource, except as otherwise indicated. For law firm rankings, IPOs by VC-backed companies and sales of VC-backed companies are included under the current name of each law firm.
Special note on data: Due to delayed reporting of some transactions, the venture capital financing and M&A data discussed in this report is likely to be adjusted upward over time as additional deals are reported. Based on historical experience, the adjustments in US data are likely to be in the range of 5–10% in the first year following the initial release of data and in smaller amounts in succeeding years, and the adjustments in European data are likely to be more pronounced. © 2015 Wilmer Cutler Pickering Hale and Dorr llp
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