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East Coast Q3 financings more investor friendly
By siliconindia
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Tuesday, 12 November 2002, 20:30 IST
PALO ALTO: A survey by Palo Alto-based firm, Fenwick & West LLP, has made an interesting comparison of legal terms of venture financing on the East Coast and San Francisco Bay Area for the third quarter 2002, revealing that East Coast financing tended to have significantly more investor favorable terms.
The survey was conducted among 80 technology companies headquartered in the East Coast and 94 technology companied based in the Bay Area. It said that approximately 75 percent of the East Coast financings were down-rounds compared to 67 percent in the Bay Area, 7 percent were flat with the previous round as against 8 percent in the SF Bay Area, and 18 percent were up-rounds compared with 25 percent in the Bay Area.
The East Coast had a slightly higher percentage of down rounds than the Bay Area, the survey stated.
Interestingly, 25 percent of the post Series A East Coast financings involved a corporate reorganization as against 19 percent in the SF Bay Area. And 55 percent of these reorganizations involved a reverse split of the outstanding stock compared to 67 percent in the SF Bay Area.
As far as participation in liquidation is concerned, as much as 78% of the East Coast financings provided for participation compared to 73% in the SF Bay Area. Of the financings that had participation, 70% were not capped in East Coast and 51% in the SF Bay Area.
The percentage of financings providing for senior liquidation preferences were also significantly higher on the East Coast than in the SF Bay Area, and the East Coast financings were more likely to contain multiple liquidation preferences.
The survey also found that East Coast financings tended to make significantly more use of cumulative dividend provisions than those in the SF Bay Area. Cumulative dividends were found in significant numbers in all rounds in East Coast financings, with 47 percent of Series A, 68 percent of Series B, 59 percent of Series C, 69 percent of Series D and 27 percent of Series E and higher including cumulative dividend provisions.
It stated that, The increase in the percentage of down-rounds seen in the third quarter, together with the increase in the number of corporate reorganizations, suggests that the difficult financing environment is not yet improving. This is perhaps not surprising given that NASDAQ has declined approximately 14 percent for the quarter and approximately 35 percent over the past two quarters. However, despite the overall difficult market there appears to be a continued softening in the use of some of the harsher provisions, such as multiple liquidation preferences and ratchet anti-dilution.