Venture Investing:

Investment Criteria

Venture First-Round Funding

Post-dom.com-bubble Trends in the Silicon Valley

 

The compilation is made by the law firm of Fenwick and West

 

3Ws of Venture Investing

 

Term

PRE "dot com bubble"

POST "dot com bubble"

Valuation

$15-$100 million pre-money

$3-$10 million pre-money

Investment Amount

$5-$30 million

$2-$10 million

Number of Investors

Single VC investor

At least 2 VC investors

Closing Cycle

1-2 months

3-4 months

Closings

Single tranche investment

Milestone-based tranches

Dividends

Non-mandatory, non-cumulative 8% per year

Mandatory, cumulative, payable in kind 15% per year

Liquidation Preference 

1Xpurchase price, plus participation rights to 3X

3X purchase price, plus participation rights with no cap

 

Redemption

None

At option of holders after 5 years at purchase price accrued dividends 

Automatic Conversion

Upon Qualified IPO of $50 million, no price limit

Upon Qualified IPO $25 million, and at least 5X purchase price 

Antidilution Protection

Standard broad-based weighted average adjustment

Full ratchet adjustment for a period; then weighted average 

Board Composition

2 VCís; 2 Common; 1 Outsider

Same 

Protective Provisions

Investor approval of: senior securities, sale of company, payment of dividends, liquidation, change of rights

Investor approval of senior or pari passu securities, sale of company, payment of dividends, change of rights, change of business, incurrence of debt over specified limit, annual budgets and variances, acquisitions of other businesses, grant of exclusive rights in technology, appointment or termination of CEO 

Pre-emptive Rights

Right to maintain pro-rata ownership in later financings

Right to invest 2X pro-rata ownership in later financing 

 

Most Favored Nations Treatment

None

Right to get any more favorable terms granted in later financings 

Pay to Play Provisions

Often used; preferred loses anti-dilution protection if donít participate in later financing at lower price

More common now; preferred automatically converts to common if donít participate in  later financing at lower price 

First Refusal Rights

Right to purchase any shares proposed to be sold by employees

Right to purchase any shares proposed to be sold by any shareholder 

Co-Sale Rights

Right to sell alongside any founder that sells shares

Right to sell alongside any shareholder that sells shares 

Drag-Along Rights

None

Right to force all shareholders to sell company upon board and majority shareholder approval 

Forced Sale

None

Right to force board to sell company after 5 years if no IPO 

Founder Vesting

Standard 4-year vesting with some up-front vesting

Moving to 5-year vesting

Employment Agreements

None

Employment agreements for key founders

Representations and Warranties

From company only

Some reps and warranties from founders individually re IP etc

Venture Financing Funnel Download PowerPoint presentation, pdf e-book

Venture Financing: Key Documents      Startup Business Plan