Posts Tagged ‘liquidation preferences’

Term sheets tilting in the direction of VC’s

Monday, February 16th, 2009

One of the panel discussions I look forward to attending at the annual Florida Venture Capital Conference (organized by the Florida Venture Forum) is titled “Latest Fads in Term Sheets“.  This one is always a favorite of mine as it gives me a view into the VC industry that is otherwise usually difficult to find.  This year’s panelists at the recent conference in Naples were Dave Felman of Hill Ward Henderson, John Glushik of Intersouth Partners, Randy Poliner of Antares Capital, Jack Rybicki of Larsen Allen, and Steve Vazquez of Foley and Lardner.  The panel was moderated by Carl Roston of Akerman Senterfitt.    VC term sheets are like weather vanes - they turn in the direction of the prevailing economic winds and the winds are now (and have been for at least a quarter) blowing in the direction of the VC’s.  As the panel discussed, some of the key terms that founders and their management teams are now finding in their deals include:

  • Valuations - the economy and lack of timely exit opportunities is resulting in significantly lower valuations than last year (although the good news for early-stage deals is that valuations are already low - so how much lower can they really go?)
  • Milestone based investments - investments are increasingly being staged and tied to milestones that are spaced further apart in time with little or no increase in valuation
  • Liquidation preferences - deals with multiples in liquidation preferences (1.5 to 2X now and potentially going higher) are coming back.  Liquidation preferences protect the investor if there are subsequent flat or down rounds but significantly reduce the value of the common shareholders (read founders and management team) stock at a liquidity event.  Preferences of 3 and 4X were seen during and after the 2000 - 2002 tech bubble collapse which resulted in tremendous disparities between common and preferred shareholder value at a liquidity event).
  • Vesting - new vesting schedules for previously vested founders and management are being imposed in new funding rounds as exits are pushed out.

In this economy and funding environment these terms are the new norm. What can an entrepreneur do to gain more favorable terms?  I’m afraid not much other than to know what the prevailing terms are and to negotiate a deal that is not less favorable than what others are signing.  On the positive side, those founders and management teams with a term sheet in hand contemplating these issues are probably secretly counting their lucky stars!