Every quarter, one of the leading venture capital focused law firms in the Bay Area, Fenwick & West, prepares and publishes a
report on venture capital activity during the quarter. Unlike other reports, the focus of their report is on deal terms.
Among other data points, the report measures the proportion of deals done at higher, lower and flat prices relative to the last prior round. For the third quarter of 2006, the proportion of "up" rounds was 67%, "down" rounds were 24% and "flat" rounds represented 9% of deals. Among up rounds, the average price increase was 69%.
The report also tracks the use of anti-dilution provisions. In the last quarter, 95% of venture deals incorporated a weighted average calculation and only 4% featured a full ratchet. Just 1% of the transactions had no antidilution provision.
Bay Area practices are widely, but not universally emulated. Here in Utah, Bay Area deal structures are frequently implemented. This is in contrast to East Coast deal terms, which somehow fail to cross the Rocky Mountains.
That said, in my experience negotiating deal terms on both coasts, we see that deal terms tend to balance out. All else equal, the deal structures in the East favor the investors, but all else isn't typically equal. Valuations frequently get structured to make up for any loss in value resulting from terms. At the end of the day, the investors have to believe they are going to make a boat load on an entrepreneur's deal before investing.
Anyone can subscribe to receive copies of the report. If you ever anticipate doing a venture deal in the future, I recommend reviewing the most recent copy and getting subscribed for future reports.
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