From the WSGR Database: Financing Trends for 2016

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1 THE ENTREPRENEURS REPORT Private Company Financing Trends Full-Year From the WSGR Database: Financing Trends for by Quarter Quarter and and Rounds Rounds by 10 9 % of All Financings IN THIS ISSUE Private Company Financing Deal Terms... Page 4 Bridge Loans... Page 5 Bridge Loans - Deal Terms... Page 6 Flat Venture financing data shows that was an exceptionally strong year for earlystage valuations and amounts raised. Median pre-money valuations for Financing Trends for... Pages 1-6 Series A and Seed financings exceeded those of each of the past five years, while the median amount raised for Series A and Seed financings $3.4 million topped all prior years tracked. Similarly, the median amount raised in post-series A bridge loans $1.7 million set a five-year high. On the other hand, Series C and later rounds saw pre-money valuations and amounts raised decline from the past two and Rounds rounds were slightly less prevalent, and down rounds were slightly more prevalent, in as compared to earlier in and to. rounds represented 76% of financings, while down rounds represented (as compared to 7 and 1, respectively, in ). For full-year, up rounds represented 77% of all financings, a decrease from full-year s historically high 8. Conversely, down rounds increased from of financings to 1 of financings. years, though they stayed in line with fiveyear medians. (Continued on page 2)

2 Full-Year Valuations C and later deals dropped from $147.5 Early-stage valuations were historically, which brought the full-year Median Amount Raised million in to $120.0 million in high in. The full-year median The median amount raised for Series A and Seed financings topped all prior years tracked median Series C and later valuation to pre-money valuation for Series A and Seed $89.1 million below the five-year median financings was $13.0 million, higher than of $95.0 million. those of the past five years and well above $3.4M Amounts Raised the five-year median of $8.5 million. The median pre-money valuation of $15.0 While median amounts raised million for Series A and Seed financings for Seed, Series A, and Series B rounds was the second-highest quarterly figure were generally lower than in, full-year in the past five years, lower only than the Series B financings likewise dipped amounts raised were higher than any prior quarter s $17.7 million figure. Similarly, to $5.3 million from the high of others in the past five years. Specifically, while the median pre-money valuation $8.0 million, although the full-year the $3.4 million median amount raised for Series B rounds dropped slightly from Series B median amount raised was $7.0 in Series A and Seed transactions $38.0 million in to $34.3 million million, exceeding the five-year median of exceeded median amounts raised in in, the full-year median $5.8 million. The median amount raised all prior years tracked, even though of $34.4 million outpaced the five-year in Series C and later transactions rose to s $3.4 million figure was markedly median of $30.0 million. On the other hand, the median pre-money valuation for Series down from s all-time high of $4.9 $12.8 million in, representing the million. The median amount raised in highest value of the year s four quarters. Median Pre-Money Valuation Median Pre-Money Valuation $ Millions Full-Year Full-Year Full-Year Full-Year Full-Year Series A (excludes Angel) Series B 2 Series C and Later

3 Full-Year Median Amount Raised - Equity Financings Median Amount Raised Equity Financings $ Millions Full-Year Full-Year Full-Year Full-Year Full-Year Series A (excludes Angel) Series B Series C and Later The full-year median for Series C and seen in both up and down rounds, with all deals in, a notable increase from later transactions fell to $10.2 million from senior liquidation preferences in up rounds the 8 figure in. Conversely, the the highs reached in and, just growing from 3 in to 36% in, use of narrow-based weighted average $1.8 million below the five-year median of and use in down rounds increasing from anti-dilution protection fell from 1 of all $12.0 million. The somewhat lower median 3 in to 4 in. Meanwhile, deals in to just in. amounts raised for Series C and later pari passu liquidation preferences in down transactions in may reflect strategic rounds decreased from 5 in to Data on deal terms such as liquidation decisions by private companies to avoid 4 in. preferences, dividends, and others are set raising relatively large amounts of money at forth in the table on page 4. To see how late-stage valuations that are meaningfully The percentage of financings having a the terms tracked in the table can be used below the peaks reached in late. liquidation preference with participation in the context of a financing, we encourage remained steady for all financings at 2. you to draft a term sheet using our However, the proportion of down rounds automated Term Sheet Generator, which with participating liquidation preferences is available in the Start-s and Venture dropped from 47% in to 26% in. Capital section of the firm s website at Deal Terms Preferred The use of senior liquidation preferences increased modestly in Series B and later rounds, from 3 of all such rounds in to in. The increase was Investors received broad-based weighted average anti-dilution protection in 9 of 3

4 Full-Year Private Company Financing Deal Terms (WSGR Deals)1 All Rounds2 All Rounds2 All Rounds2 All Rounds2 Senior % 47% 68% 3 4 Pari Passu with Other Preferred 5 56% 6 57% % 6 37% Junior Complex 1 Not Applicable Participating - Cap 18% 8% Participating - No Cap Non-participating % 77% 77% 48% 5 5 Yes, Cumulative 1 6% 1 7% 1 2 Yes, Non-cumulative % % 7 None % Weighted Average - Broad % Weighted Average - Narrow 1 6% 1 Ratchet Other (Including Blend) None 6% Applicable to This Financing 1 18% Applicable to Future Financings None 9 96% 98% 9 97% 96% Investor Option Mandatory None % 7 77% 67% 88% 9 Liquidation Preferences - Series B and Later Participating vs. Non-participating Dividends Anti-dilution Provisions Pay to Play - Series B and Later Redemption We based this analysis on deals having an initial closing in the period to ensure that the data clearly reflects current trends. Please note that the numbers do not always add up to 10 due to rounding. Includes flat rounds and, unless otherwise indicated, Series A rounds. 3 Note that the All Rounds metrics include flat rounds and, in certain cases, Series A financings as well. Consequently, metrics in the All Rounds column may be outside the ranges bounded by the Rounds and Rounds columns, which will not include such transactions

5 Full-Year Bridge Loans 76% had interest rates less than 8%, up slightly, from of deals in to The median amount raised for pre-series from, 7, and 7 in,, 8 of deals in. On the other hand, and, respectively. Further, only the size of discounts dropped, with the of pre-series A bridge loans had percentage featuring a discount of over interest rates greater than 8% in, 2 declining from of such loans in slightly fewer than in and. to in. Interest rates are typically higher for We recently started tracking whether post-series A bridge loans, though they convertible note conversion was automatic haven t shown the same gradual increase or voluntary, the dollar thresholds for as earlier-stage deals. For post-series A conversion, and the price cap amounts. Of bridge loans, rates above 8% climbed the pre-series A convertible bridges, slightly from 1 of deals in to 9 had automatic conversion and 1 in, while 5 of such loans bore had voluntary conversion. The breakdown rates of less than 8%, on par with what was similar for post-series A deals, was seen in. with 9 having automatic conversion A bridge loans remained flat at $0.19 million in compared to. The full-year median amount raised was $0.28 million, slightly lower than in and. The median amount raised for post-series A bridge loans also remained flat compared to, but the high median amount raised in brought the year s cumulative median to $1.7 million a five-year high. $1.7M Post-Series A Bridge Loan Median Amount Raised and 8% having voluntary conversion. The post-series A bridge loan median amount raised in reached a five-year high Price caps and discounts upon $25M conversion became more popular in for pre-series A bridge loans. Price caps Deal Terms - Bridge Loans $6M increased from 6 of deals in to 7 of deals in, Bridge loan interest rates for pre-series A and discounts on conversion deals continued a slight downward trend of pre-series A loans also rose in. Among pre-series A bridge loans, Median Amount AmountRaised Raised - Bridge Bridge Loans Loans Median pre-series A bridge loans had a median price cap of $6M, compared to $25M for post-series A bridge loans The median dollar Pre- and Bridge Loans threshold for a qualified financing in pre Series A loans was $ $ Millions 1.0 million. Not surprisingly, the corresponding amounts for post-series 0.87 A deals were notably Series A bridges had a median price cap of $ million, and pre higher, at $4.0 million and $25.0 million, respectively. We will Full-Year Full-Year Full-Year Full-Year Full-Year Pre-Series A Bridge Post-Series A Bridge 5 continue to track these terms and report periodover-period changes.

6 Full-Year Bridge Loans Deal Terms (WSGR Deals)1 Interest rate less than 8% % 46% Interest rate at 8% Interest rate greater than 8% 6% 7% Maturity less than 12 months Maturity at 12 months 1 3 8% 2 Maturity more than 12 months % 58% 4 Debt is subordinated to other debt % 48% 4 Loan includes warrants2 8% Warrant coverage less than % 2 Warrant coverage at 2 7% % 6 Principal is convertible into equity % 9 97% 86% 9 Conversion rate subject to price cap4 68% 67% % 2 Conversion to equity at discounted price Discount on conversion less than Discount on conversion at % 46% 4 47% 4 Discount on conversion greater than % 26% 18% Bridge Loans Warrant coverage greater than 2 Conversion to equity at same price as other investors We based this analysis on deals having an initial closing in the period to ensure that the data clearly reflects current trends. Please note the numbers do not always add up to 10 due to rounding. Of the post-series A bridges with warrants, also had a discount on conversion into equity. Of the post-series A bridges with warrants, also had a discount on conversion into equity. Of the post-series A bridges with warrants, 58% also had a discount on conversion into equity. Of the post-series A bridges with warrants, 3 also had a discount on conversion into equity. 3 Of the pre-series A convertible bridges, 9 had automatic conversion and 1 had voluntary conversion. Of the post-series A convertible bridges, 9 had automatic conversion and 8% had voluntary conversion. The median dollar threshold for a qualified financing in pre- and post-series A bridges was $1M and $4M, respectively. 4 pre-series A bridges had a median price cap of $6M. post-series A bridges had a median price cap of $25M. 5 Of the post-series A bridges that had a discount on conversion into equity, 1 also had warrants. Of the post-series A bridges that had a discount on conversion into equity, 1 also had warrants. Of the post-series A bridges that had a discount on conversion into equity, 2 also had warrants. Of the post-series A bridges that had a discount on conversion into equity, 8% also had warrants

7 Full-Year WSGR Methodology The //Flat analysis is based on WSGR deals having an initial closing in the period reported to ensure that the data clearly reflects current trends. For purposes of the statistics and charts in The median pre-money valuation is calculated based on the pre-money valuation given at the time of the initial closing of the round. If the issuer has a closing in a subsequent quarter, the original pre-money valuation is used in the calculation of the median for that quarter as well. this report, our database includes venture financing transactions in which Wilson Sonsini Goodrich & A substantial percentage of deals have multiple closings that span fiscal quarters. The median amount raised is calculated based on the aggregate amount raised in the reported quarter. For purposes of this report, Series Seed transactions are included with Series A transactions. Rosati represented either the company or one or more of the investors. Dow Jones VentureSource Ranks WSGR No. 1 for Venture Financing Deals Dow Jones VentureSource s legal rankings for issuer-side venture financing deals ranked Wilson Sonsini Goodrich & Rosati ahead of all other firms by the total number of rounds of equity financing raised on behalf of clients. WSGR is credited as legal advisor in 207 rounds of financing, while its nearest competitor advised on 136 rounds of financing. According to VentureSource, WSGR ranked first for issuer-side U.S. deals in the following industries: cleantech, communications and networking, consumer services, electronics and hardware (tie), energy and utilities, healthcare, industrial goods and materials, information technology, medical devices and equipment, semiconductors (tie), and software. The firm ranked second in biopharmaceuticals and business and financial services, and third (tie) in consumer goods. WSGR Partners with Tech City UK to Provide Resources for Entrepreneurs Wilson Sonsini Goodrich & Rosati has partnered with Tech City UK, a UK-governmentbacked organization tasked with accelerating the growth of UK digital businesses, to publish guidance for entrepreneurs on launching, scaling, and raising capital in the United States. This guidance, which will be provided on a regular basis starting in February 2017, will serve as a resource on U.S. expansion and fundraising for the UK technology community. For more information, please visit the Tech City UK blog at com/?post_type=post. 7

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