Pulse of the Practice July 2009 by Eric Koester

Transcription

1 Pulse of the Practice July 2009 by Eric Koester In July 2009, the PE/VC Committee of the Section of Business Law of the ABA completed its first survey of the lawyers in the committee, called "Pulse of the Practice". The aim of the survey was to gather insights, anecdotal evidence, and observations from the attorneys that are practicing in the area. Our first survey was focused on individuals practicing in venture capital, and more than 75 respondents participated. Future surveys will focus on attorneys in the private equity space. From our initial survey, we identified a number of interesting result (the full summary of survey data is attached). What did we learn: Workload Changes in 2009 Over 58% of respondents had seen a decrease in their VC/PE workload from 2008 to with 19% noting no change and, perhaps surprisingly, 22% seeing some increase in their workload. Perhaps this notes that 2008 was even slower than expected and 2009 already was showing signs of increases. Comparing 2009 to the last three years ( ), the vast majority of respondents noted a decrease in work -- with 43% noting substantial decreases in workloads, 37% noting a decrease and just 21% noting an increase or no change. When asked the amount of decrease in workload that respondents had seen in 2009, answers ranged from as high as 75 to 80% decreases -- with the highest numbers noting decreases of 20-30%. Anticipating in Workload for the remainder of 2009 and 2010 No respondents said they were expecting a substantial decrease in the rest of the year or next year in work -- the majority 54% and 71% expected increases in the remainder of 2009 and in 2010, respectively. 38% and 17% expected no change in workload in the remainder of 2009 and in 2010, respectively. Trends in the practice (2009 vs 2008) 82% of respondents said valuations had decreased year-over-year. While many respondents saw decreases in the number of first round (49%) and later-stage VC financings (46%), a surprising number had seen increases (21% and 22% respectively) or no change (30% and 32%, respectively) from 2008.

2 Again, perhaps this suggests that for many practitioners, 2008 was worse than some had suggested and already 2009 has showed signs of improvements. Respondents saw a decline in M&A and IPO activity, but a relatively large number of respondents suggested that the numbers had not changed further in 2009 or had actually increased in 2009 compared to Expectations in the practice for 2009 and 2010 Respondents were overwhelmingly bullish with only 4% predicting declines in their number of startup clients, 7% expecting declines in the number of first round financings, 10% expecting declines in later stage deals and 6% expecting further declines in M&A activity. A relatively larger number do expect further softness in valuations with 23% expecting valuations to further decrease over the next 12 months. While respondents were bullish, most (62%) expect the IPO window to remain stagnant. Venture Capital Deal Documents Most firms continue to retain and use their own deal documents (56%), but 36% are using the NVCA forms as a starting point for drafting. Convertible bridges are still the most common pre-vc financing tool, but preferred stock and common stock represent 24% and 11%, respectively, of the most common investment vehicles for a pre-vc financing. In a term sheet, the most heavily negotiated items (per respondents) are: (1) Protective Provisions and (2) Liquidation Preference, with items such as redemption, option pool size, board seats and exclusivity being moderately negotiated. In the deal docs, respondents saw provisions such as antidilution, protective provisions and board seats as only moderately negotiated but the most negotiated provisions. The typical legal fees for a first round financing were: Company side = $20,000 to 29,999 (40%) and Investor side = $20,000 to 29,999 (43%). In each case, a relatively sizeable second (29% and 28%, respectively) was $30-39K for fees for company and investor representation. 2

3 Interesting Other Facts Commentary on what are the most likely issues to derail a financing: Most often heard: "Valuation" or "Pricing"; Second most heard: "IP issues" Commentary on the changes in deals in the past year: Most often heard: "Stronger and More Reps" If you have additional questions or ideas you'd like to see in the next Pulse of the Practice survey, contact Eric Koester at ekoester@cooley.com. 3

4 1 of 16 7/19/2009 4:35 PM Logged in as "EAKoester" Log Off Home Create Survey My Surveys Address Book My Account Need Help? survey title: Pulse of the Practice (Venture Capital Deals) Edit Title design survey collect responses analyze results View Summary current report: Add Report Browse s Filter s Summary Total Started Survey: 77 Total Completed Survey: 58 (75.3%) Crosstab s s Page: Background Information Show this Page Only Share s 1. Geographically, where are your clients (in the VC space) located? 0% 1% to 25% 26% to 50% 51% to 75% 75% to 99% 100% Silicon Valley 26.3% (5) 26.3% (5) 15.8% (3) 15.8% (3) 15.8% (3) 0.0% (0) 19 New England 11.1% (2) 27.8% (5) 11.1% (2) 16.7% (3) 22.2% (4) 11.1% (2) 18 LA/Orange y 25.0% (3) 75.0% (9) 0.0% (0) 0.0% (0) 0.0% (0) 0.0% (0) 12 NY Metro 22.2% (4) 61.1% (11) 11.1% (2) 0.0% (0) 0.0% (0) 5.6% (1) 18 answered question 72 skipped question 5

5 2 of 16 7/19/2009 4:35 PM 1. Geographically, where are your clients (in the VC space) located? Midwest 16.0% (4) 12.0% (3) 0.0% (0) 12.0% (3) 32.0% (8) 28.0% (7) 25 San Diego 55.6% (5) 22.2% (2) 11.1% (1) 0.0% (0) 11.1% (1) 0.0% (0) 9 Northwest 15.4% (2) 23.1% (3) 15.4% (2) 0.0% (0) 30.8% (4) 15.4% (2) 13 Southeast 15.8% (3) 15.8% (3) 10.5% (2) 26.3% (5) 21.1% (4) 10.5% (2) 19 Texas 50.0% (5) 40.0% (4) 0.0% (0) 0.0% (0) 0.0% (0) 10.0% (1) 10 DC/Metroplex 50.0% (4) 12.5% (1) 25.0% (2) 12.5% (1) 0.0% (0) 0.0% (0) 8 Philadelphia Metro 50.0% (4) 12.5% (1) 0.0% (0) 12.5% (1) 12.5% (1) 12.5% (1) 8 Colorado 50.0% (4) 12.5% (1) 25.0% (2) 0.0% (0) 12.5% (1) 0.0% (0) 8 North Central 50.0% (5) 30.0% (3) 10.0% (1) 10.0% (1) 0.0% (0) 0.0% (0) 10 SouthWest 54.5% (6) 9.1% (1) 9.1% (1) 0.0% (0) 18.2% (2) 9.1% (1) 11 South Central 100.0% (6) 0.0% (0) 0.0% (0) 0.0% (0) 0.0% (0) 0.0% (0) 6 Upstate NY 85.7% (6) 14.3% (1) 0.0% (0) 0.0% (0) 0.0% (0) 0.0% (0) 7 AK/HI/PR 85.7% (6) 0.0% (0) 0.0% (0) 0.0% (0) 0.0% (0) 14.3% (1) 7 Sacramento/N.Cal 50.0% (4) 50.0% (4) 0.0% (0) 0.0% (0) 0.0% (0) 0.0% (0) 8 answered question 72 skipped question 5 2. Who do you more often represent in venture, angel and private equity investment transactions, the investor or the company?

6 3 of 16 7/19/2009 4:35 PM 2. Who do you more often represent in venture, angel and private equity investment transactions, the investor or the company? Percent Investors 31.2% 24 Companies 46.8% 36 About equal / only a small difference 22.1% 17 answered question 77 skipped question 0 3. Approximately how many venture-, angel-, private equity-backed, private COMPANIES do you represent (or regularly work with)? Percent Under % % % % % 0 50 or more 3.9% 3 answered question 76 skipped question 1

7 4 of 16 7/19/2009 4:35 PM 4. Approximately how many venture capital funds, angel funds/investors, private equity funds/firms or similar INSTITUTIONAL INVESTORS do you represent (or regularly work with)? Percent Under % % % % % 0 50 or more 1.3% 1 answered question 77 skipped question 0 5. Approximately how many venture capital or private equity financings have you been involved in during the past 12 months (Q3/ and Q1/2 2009)? Percent Under % % % 7 answered question 77 skipped question 0

8 5 of 16 7/19/2009 4:35 PM 5. Approximately how many venture capital or private equity financings have you been involved in during the past 12 months (Q3/ and Q1/2 2009)? % 5 21 or more 3.9% 3 answered question 77 skipped question 0 Show this Page Only Page: Venture Capital/Private Equity Trends 1. Have you noticed an overall change in your workload in the VC/PE area? Substantial Increase Increase No change Decrease Substantial Decrease First Half 2009 vs Last Half % (4) 26.0% (19) 20.5% (15) 37.0% (27) 11.0% (8) 73 Q vs Q % (3) 33.8% (23) 39.7% (27) 16.2% (11) 5.9% (4) vs % (2) 19.4% (13) 19.4% (13) 44.8% (30) 13.4% (9) vs % (0) 8.8% (6) 11.8% (8) 36.8% (25) 42.6% (29) 68 Show replies How much of a percentage would you say your workload has increased or decreased in 2009? 44 answered question 73 skipped question 4 2. What are you anticipating in your overall workload in the VC/PE area?

9 6 of 16 7/19/2009 4:35 PM 2. What are you anticipating in your overall workload in the VC/PE area? Substantial Increase Increase No change Decrease Substantial Decrease 2nd Half of % (2) 53.5% (38) 38.0% (27) 5.6% (4) 0.0% (0) % (6) 70.8% (46) 16.9% (11) 3.1% (2) 0.0% (0) 65 answered question 72 skipped question 5 3. Based on your experience in 2008 compared to 2009, what is the trend in your practice? (select one in each row) Substantial Increase Increase No change Decrease Substantial Decrease # of New Startup Clients 2.9% (2) 30.4% (21) 36.2% (25) 27.5% (19) 2.9% (2) 69 # of First Round Venture Financings 0.0% (0) 21.4% (15) 30.0% (21) 38.6% (27) 10.0% (7) 70 # of Later Round Venture Financings 0.0% (0) 22.1% (15) 32.4% (22) 35.3% (24) 10.3% (7) 68 Amount of M&A Activity involving private, venture-backed clients 1.4% (1) 15.7% (11) 30.0% (21) 37.1% (26) 15.7% (11) 70 Amount of IPO Activity involving private, venture-backed clients 0.0% (0) 5.8% (4) 42.0% (29) 15.9% (11) 36.2% (25) 69 Size of Valuations 0.0% (0) 4.2% (3) 14.1% (10) 70.4% (50) 11.3% (8) 71 answered question 71 skipped question 6

10 7 of 16 7/19/2009 4:35 PM 3. Based on your experience in 2008 compared to 2009, what is the trend in your practice? (select one in each row) # of dissolutions, winding up, etc. 10.0% (7) 42.9% (30) 40.0% (28) 5.7% (4) 1.4% (1) 70 answered question 71 skipped question 6 4. What are you anticipating in your practice for the next 12 months (Q3/ and Q1/2 2010)? Substantial Increase Increase No change Decrease Substantial Decrease # of New Startup Clients 4.2% (3) 56.3% (40) 35.2% (25) 4.2% (3) 0.0% (0) 71 # of First Round Venture Financings 0.0% (0) 59.2% (42) 33.8% (24) 7.0% (5) 0.0% (0) 71 # of Later Round Venture Financings 0.0% (0) 58.6% (41) 31.4% (22) 10.0% (7) 0.0% (0) 70 Amount of M&A Activity involving private, venture-backed clients 4.3% (3) 62.9% (44) 27.1% (19) 5.7% (4) 0.0% (0) 70 Amount of IPO Activity involving private, venture-backed clients 1.4% (1) 24.3% (17) 61.4% (43) 10.0% (7) 2.9% (2) 70 Size of Valuations 0.0% (0) 31.4% (22) 45.7% (32) 22.9% (16) 0.0% (0) 70 # of dissolutions, winding up, etc. 1.4% (1) 37.1% (26) 50.0% (35) 10.0% (7) 1.4% (1) 70 answered question 71 skipped question 6 Show this Page Only

11 8 of 16 7/19/2009 4:35 PM Page: Transaction & Deal Term Negotiations 1. If you are drafting documentation, what forms do you primarily utilize for a venture capital financing? Percent National Venture Capital Association (NVCA) forms 35.2% 19 Internal firm forms 57.4% 31 Forms from another firm or firms 5.6% 3 Other (specify) 1.9% 1 Show replies Other (please specify) 2 answered question 54 skipped question Which of these is more/least common for pre-venture capital investments (ie. a Seed/Angel Round)? Most Common Second-most Common Least Common Convertible Bridge Financing (Promissory Notes) 68.6% (35) 27.5% (14) 3.9% (2) 51 answered question 52 skipped question 25

12 9 of 16 7/19/2009 4:35 PM 2. Which of these is more/least common for pre-venture capital investments (ie. a Seed/Angel Round)? Priced Preferred Stock Round 22.0% (11) 62.0% (31) 16.0% (8) 50 Price Common Stock Round 11.5% (6) 11.5% (6) 76.9% (40) 52 answered question 52 skipped question In your experience, what are the most heavily negotiated agreement provisions OF A TERM SHEET in a typical venture capital financing? Non Negotiated Heavily Moderately Lightly at All (i.e. This Negotiated Negotiated Negotiated term is always Market ) Dividends 9.6% (5) 28.8% (15) 40.4% (21) 21.2% (11) 52 Liquidation Preference 36.5% (19) 30.8% (16) 23.1% (12) 9.6% (5) 52 Redemption Provisions 18.0% (9) 40.0% (20) 32.0% (16) 10.0% (5) 50 Conversion Provisions 19.6% (10) 25.5% (13) 41.2% (21) 13.7% (7) 51 Antidilution Provisions 28.0% (14) 30.0% (15) 34.0% (17) 8.0% (4) 50 Voting Rights 26.9% (14) 25.0% (13) 36.5% (19) 11.5% (6) 52 Protective Provisions 54.7% (29) 34.0% (18) 7.5% (4) 3.8% (2) 53 answered question 53 skipped question 24

13 10 of 16 7/19/2009 4:35 PM 3. In your experience, what are the most heavily negotiated agreement provisions OF A TERM SHEET in a typical venture capital financing? Registration Rights 2.0% (1) 13.7% (7) 43.1% (22) 41.2% (21) 51 Informational Rights 7.7% (4) 13.5% (7) 44.2% (23) 34.6% (18) 52 Right of First Offer 1.9% (1) 25.0% (13) 50.0% (26) 23.1% (12) 52 Co-Sale/Right of First Refusal 6.1% (3) 30.6% (15) 49.0% (24) 14.3% (7) 49 Size of Option Pool 22.6% (12) 50.9% (27) 24.5% (13) 1.9% (1) 53 Board Seats 23.1% (12) 46.2% (24) 26.9% (14) 3.8% (2) 52 Exclusivity 13.5% (7) 30.8% (16) 30.8% (16) 25.0% (13) 52 Other 57.1% (8) 7.1% (1) 14.3% (2) 21.4% (3) 14 Show replies Other (please specify) 11 answered question 53 skipped question Specifically, what are the three most heavily negotiated provisions, deal points, language, etc. in the term sheet? Percent Show replies % 41 answered question 41 skipped question 36

14 11 of 16 7/19/2009 4:35 PM 4. Specifically, what are the three most heavily negotiated provisions, deal points, language, etc. in the term sheet? Show replies % 41 Show replies % 40 answered question 41 skipped question In your experience, what are the most heavily negotiated agreement provisions IN FINANCING DOCUMENTS (post-term sheet) in a typical venture capital financing? Non Negotiated Heavily Moderately Lightly at All (i.e. This Negotiated Negotiated Negotiated term is always Market ) Dividends 8.9% (4) 17.8% (8) 37.8% (17) 35.6% (16) 45 Liquidation Preference 21.7% (10) 23.9% (11) 41.3% (19) 13.0% (6) 46 Redemption Provisions 17.8% (8) 33.3% (15) 37.8% (17) 11.1% (5) 45 Conversion Provisions 15.2% (7) 23.9% (11) 50.0% (23) 10.9% (5) 46 Antidilution Provisions 23.9% (11) 34.8% (16) 32.6% (15) 8.7% (4) 46 Voting Rights 20.5% (9) 20.5% (9) 45.5% (20) 13.6% (6) 44 Protective Provisions 30.4% (14) 47.8% (22) 17.4% (8) 4.3% (2) 46 answered question 46 skipped question 31

15 12 of 16 7/19/2009 4:35 PM 5. In your experience, what are the most heavily negotiated agreement provisions IN FINANCING DOCUMENTS (post-term sheet) in a typical venture capital financing? Registration Rights 4.3% (2) 8.7% (4) 56.5% (26) 30.4% (14) 46 Informational Rights 2.2% (1) 17.4% (8) 50.0% (23) 30.4% (14) 46 Right of First Offer 4.3% (2) 28.3% (13) 54.3% (25) 13.0% (6) 46 Co-Sale/Right of First Refusal 8.7% (4) 37.0% (17) 39.1% (18) 15.2% (7) 46 Size of Option Pool 10.9% (5) 23.9% (11) 39.1% (18) 26.1% (12) 46 Board Seats 13.0% (6) 34.8% (16) 34.8% (16) 17.4% (8) 46 Exclusivity 7.0% (3) 20.9% (9) 34.9% (15) 37.2% (16) 43 Other 23.1% (3) 38.5% (5) 15.4% (2) 23.1% (3) 13 Show replies Other (please specify) 9 answered question 46 skipped question Specifically, what are the three most heavily negotiated provisions, deal points, language, etc. IN FINANCING DOCUMENTS (post-term sheet)? Percent Show replies % 35 answered question 35 skipped question 42

16 13 of 16 7/19/2009 4:35 PM 6. Specifically, what are the three most heavily negotiated provisions, deal points, language, etc. IN FINANCING DOCUMENTS (post-term sheet)? Show replies % 31 Show replies % 29 answered question 35 skipped question In the past year, what are the biggest changes you ve noticed in venture capital financings this year than in prior years (i.e. new reps being asked for; changes in provisions; modifications to legal opinion language, etc.) Show replies 35 answered question 35 skipped question For company-side representation, what are your Legal Fees in a typical first round venture capital financing (i.e. Series A Preferred Stock)? Percent Under $20,000; 11.8% 6 $20,000 to $29,999; 41.2% 21 answered question 51 skipped question 26

17 14 of 16 7/19/2009 4:35 PM 8. For company-side representation, what are your Legal Fees in a typical first round venture capital financing (i.e. Series A Preferred Stock)? $30,000 to $39,999; 27.5% 14 $40,000 to $49,999; 11.8% 6 Above $50, % 4 answered question 51 skipped question For investor-side representation, what are your Legal Fees in a typical first round venture capital financing (i.e. Series A Preferred Stock)? Percent Under $20,000; 17.0% 8 $20,000 to $29,999; 42.6% 20 $30,000 to $39,999; 27.7% 13 $40,000 to $49,999; 8.5% 4 Above $50, % 2 answered question 47 skipped question 30

18 15 of 16 7/19/2009 4:35 PM 10. What are the most likely or most common company-specific issues to derail a Series A financing? Show replies 42 answered question 42 skipped question 35

19 16 of 16 7/19/2009 4:35 PM 10. What are the most likely or most common company-specific issues to derail a Series A financing? answered question 42 skipped question 35 Anti-Spam Policy Terms of Use Privacy Statement Opt Out/Opt In Contact Us We're Hiring! Copyright SurveyMonkey.com. All Rights Reserved. No portion of this site may be copied without the express written consent of SurveyMonkey.com. 35