Back in Lesson #116 we talked about the seed investment terms and trends from 2011. A lot of things haved changed since then, and I thought a refresher course was in order. To help me with this post, I leveraged the research done by my friends at Silicon Legal, a leading Silicon Valley lawfirm, in their 2014 Seed Financing Report (which includes the financing data from over 203 companies that raised $3MM or under in their first professional round in 2014).
KEY TRENDS
- Seed investors are starting to behave like later-stage venture investors (asking for key control, downside and pro-rata rights protections)
- Terms in the last three years have become a lot more "founder friendly"
- 41% of seed investors are investing in later stage rounds, desiring to protect their ownership percentages from future dilution (and 22% of which also looking at later stage deals as their first investments)
- The startup accelerator, Y Combinator, has pioneered a new investment vehicle called SAFE (Simple Agreement for Future Equity). It is convertible into next equity round, but is not a debt instrument (no interest and no due date).
- "Party rounds" continue to proliferate with an average of 9-11 investors investing in the round, with some deals seeing as many as 20 investors).
- Crowdfunding platform, AngelList, helped make papering multi-investor rounds a lot easier and faster with the launch of their syndication model (helping to rally up investors and lower legal costs)
AVERAGE EQUITY TERMS
- $7.5MM median valution in 2014 (vs. $7.2MM in 2013 and $6MM in 2012)
- $2MM median dollars raised
- 92% included board seats (84% of which was one seat)
- 95% had pre-emptive pro rata rights for future investments (58% of which had a $100K future raise threshold before kicking in)
- 97% was not a participating preferred structure
- 99% had a 1x liquidation preference, paid back before others
- 85% had anti-dilution protection, in the event future down rounds
- 88% had rights of first refusal and co-sale rights (for any sales of shares)
- 82% had drag along rights for majority shareholders (to require minorities to follow their lead)
- 100% had other standard protective provisions
AVERAGE CONVERTIBLE NOTE TERMS
- $7MM median valuation cap (vs. $6MM last year)
- $950K median dollars raised (50% over $1MM; 25% $500K-$1MM; 25% under $500K)
- 84% with a term of 12 to 24 months
- 65% with an interest rate of 4%-8%
- 65% with a 20% valuation discount to the next round
- 84% automatically convert to equity at time of an acquisition
- 78% have no change in control premiums (but 20% did for up to 2x)
- 68% allow for conversion to equity at time of maturity
- 25% allowed for pre-emptive pro rata investment rights
- 15% allowed for most favored nation revisions (if any future rounds at better terms)
- They typically no longer come with warrant coverage for additional equity
- There are no veto rights offered on any change in control scenarios
- These notes do not typically secure the assets of the company or its founders
- These notes typically do not come with board seats
For those of you interested in the new SAFE structure. They were typically $500K in size at a median $5MM valuation cap (including a 20% discount to the next round) and included pro-rata pre-emptive rights and change in control protection (at a zero to 100% premium).
So, when you are out doing your fund raising, use the above data as benchmarks for your own financings. And, enjoy the more founder-friendly terms while they last!!
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