Chris Harvey’s Post

This is a very large increase in investor friendly terms and company/ founder/ early investor unfavorable terms. However, this is a distorted view, as this counts together all rounds that are classified as “series-A”, which I know first hand includes many bailout out type and down rounds of startups that over extended and got too much of a Seed too early and need to reset in one way or another to survive. Going forward, once we settle into a new normal, terms should stabilize.

One of the things that has been notable about the current venture market downturn is that deal terms have remained relatively stable - with the very notable and critical exception of valuation. This focus on valuation contrasts with the post-2001 tech bubble when punitive financing terms increased dramatically in 2002. The attached page is from a 2003 report from the then Hale and Dorr law firm. It reports the following in 2002: ➡ Over 30% of deals had liquidation multiples ➡ A majority of deals had participating preferred ➡ A majority of deals had accruing dividends ➡ Full ratchet anti-dilution protection was present in about 25% of deals In the current market, I do not think any of these deals terms are present in more than 10-15% of deals and while they have become somewhat more common than in 2021, not dramatically so. Candidly, not completely sure why.

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While it's poor form to give your customers no advance notice, three growth-stage #shutdowns (#Bench, #Polywork and #Level) in a week is not particularly newsworthy. At those stages, the power law is still very much in play and losses are to be expected. The bigger issue is at the Late Stage, where the glut of unicorns keeps on staggering forward. We are in year 4 of a 20 year "de-leveraging" that will quietly work its way through boardrooms and increasingly complex structure on cap tables. Too much money going into too many companies at valuations they can never grow into.

This is interesting as it demonstrates the current rise of structured financings in light of the more difficult fundraising environment. Typically it is the existing investors who lead the “structured” follow on financing with terms including increased liquidation preferences, increased dividend rights, etc. A common technique that will be more visible are “pay to play” provisions. “Pay to play” is a term used in term sheets that benefits new investors at the expense of old [doesnt need to be new investors by the way]. It grows in popularity during market downturns (which is why it has become increasingly common in 2024, according to data from Cooley.) Essentially, it forces existing investors to buy all the pro rata shares they are entitled to or the company will take some punitive action, like converting their shares from preferred shares, with extra rights, to common shares, explains AngelList.” What is unusual here is that this structured deal is being led by an ousted CEO with a questionable history at an implied valuation of almost 500 times the revenue. Take out the 🍿on this one.

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What do good VCs and founders have in common with good lawyers? They understand the importance and consequence of precedent. For a lawyer that means understanding the pre-existing applicable cases which frame any question of applying the law to new situations. In venture, the past also defines the future. Terms negotiating in one financing round become the floor for terms in the next round. As a result, smart early stage investors do not propose financing terms with provisions that could come back to bite them in future, much larger rounds in which they they may have limited or no participation. Smart founders will also push back against deal terms that set a bad precedent for future rounds that may make getting financing approval from the existing shareholders or attracting new investors more difficult. An easy example - a "pay to play provision" in an early stage round. That then becomes a baseline term in all future financings. However, the early stage investor may find themselves unable to fund their prorata in a future round and as a result, penalized by the deal term precedent they set. I think this "precedent effect" is one of the factors contributing to the relative low level of changes in deal terms (outside of valuation) in the current market.

ZIRP M&A is (hopefully) dead. Let's check it out >> Having seen both buy and sell side ZIRP deals, I am hopeful that we've seen the last of "doing deals just to do deals". As much as us lawyers, corp dev, finance-type folk love "doing deals", just saw way too many "what if we miss the boat" deals get thrown together and then left on the shelf after-purchase. Because why not? You're company is "worth" 40x ARR, and you're acquiring a company at 20x ARR, that's arbitrage...right? And although these deals make founders, execs, and (preferred) share holders lots of cash (cool?) they can end up hurting existing teams in integration and post-deal swirl, and hurt acquired teams (emotionally, professionally, etc.) if the right resources, time, and thought isn't put into the product that everyone was so excited about leading up to close. Now luckily, I've also been a part of some really important and company-defining M&A, so - it wasn't all bad during ZIRP - but lets hope the good starts to thoughtfully outweigh the bad as we become smarter about capital deployment. At Altumare Capital - the businesses we acquire are all put through the same diligence, review, and discussion around capital allocation, synergies to existing businesses, and a full and unanimous commitment to post-deal/integration success. Well, (i) because we can't afford to miss at this stage as an emerging fund, but (ii) these are not just investors dollars, they're really peoples lives behind each of these deals (employees AND customers alike) How are you handling M&A post-ZIRP?

Valuation is understandably what a founder most focuses on when they receive an investment offer. But something we commonly advise founders to pay attention to are other details of the transaction, such as: * Any investor-friendly protective rights * The culture and fit of the investor * The structure of rollover equity These aspects of a transaction will have an important impact on the go-forward dynamic of your relationship with a new partner. Read the article below to learn more about which factors (other than valuation) a founder needs to seriously consider in an offer. https://lnkd.in/gEV6nZXV #founders #pathtoexit