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Founders – Use Your Down Round To Clean Up Your Cap Table

Feld Thoughts

This is a little tricky in early rounds and with modest up-round financings, as you’ll often have a liquidation preference that is high relative to your overall valuation. Then, if you end up doing a down round, it suddenly matters a lot. Don’t worry about this too much, until you do a down round. Then use the down round to clean up your preference overhang. Venture Capital cap table down round Financing VC

The Damaging Psychology of Down Rounds

Both Sides of the Table

“Whenever I hear advice about pricing a round too high for the next round, I can’t help but think: well, if the choice (ceteris paribus) is between. I would love it if other people would weigh in on the comments section below if you’ve had experiences with down rounds.

How Do I Protect My Option Grant From A Down Round In The Future?

Ask The VC

Question: I am considering joining a startup that is currently in the process of raising their next round of funding. I will be joining as a VP, reporting directly to the CEO, and considered an “executive” Given the environment for this particular industry, it is very likely that the company will face a down round – perhaps as much as 50% of their last financing a year ago. Will my options be priced based on the previous round?

Cash is King: 8 tips for Optimizing your Startup Financing Strategy

For Entrepreneurs

Getting Funded avoid down round Startup fundraising startup valuationIntroduction This post aims to help startup CEOs optimize their funding strategy by examining how investors value startups, and explaining how to avoid the common cash management pitfalls. Note: The concepts in this post will likely be obvious to experienced CEOs and entrepreneurs. Despite that, our experience indicates that entrepreneurs frequently make costly, avoidable mistakes [.].

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Capital Market Climate Change

Ben's Blog

Had you not had the experience of raising your last round so easily, you might have seen this round coming. As if the price could never go down. When you go to fundraise, you will need to consider the possibility of a valuation lower than the valuation of your last round, i.e., the dreaded down round. Down rounds are bad and hit founders disproportionately hard, but they are not as bad as bankruptcy. Yes, we did a down round.

The Resetting of the Startup Industry

Both Sides of the Table

If you raised money in the past 2 years and have grown it is possible that your next round valuation might be flat (or lower) even though you have a higher revenue because investors may value your multiple differently. If you can get a round done at the price you expect – well done.

What Most People Don’t Understand About How Startup Companies are Valued

Both Sides of the Table

” “Mark has a vested interest in talking down valuations of startups.” No you’re kind of f *d because nobody wants to buy any at all and your bank is calling you concerned that you may need to slow down your pace of new purchases for a bit. Down rounds are hard.

Burn Baby Burn

A VC : Venture Capital and Technology

You can do a down round, or three or four flat ones, until you get the price right. Andy sent me a WSJ piece with Bill Gurley yesterday. I don’t like to link to paid content so here’s a good Business Insider summary of the article that is open for anyone to read. Regular readers know that I’m a huge fan of Bill’s. He’s as smart as they come and I generally agree with him on things.

Fenwick & West - Venture Capital Survey Silicon Valley Third Quarter 2011

Recent Buzzes - VC Experts, Inc.

Up rounds exceeded down rounds in 3Q11 70% to 15%, with 15% of rounds flat. This was an increase from 2Q11 when up rounds exceeded down rounds 61% to 25%, with 14% of rounds flat. Series B rounds were exceptionally strong, comprising 38% of the relevant rounds (Series A rounds aren't included as there is no prior round for comparison purposes), and 89% of the Series B rounds were up rounds.

Unicorpse

Feld Thoughts

The current usage of the word unicorn makes me tired. I could rant about it for a while, but that would make me tired of myself ranting about it.

Guest Post: Beware The Post Money Trap

A VC : Venture Capital and Technology

Combined with a lot of money being available from investors this is resulting in Series A rounds of $10 million and more. It needs to build enough value so that the next round of fundraising can be at or ideally above the current post money valuation. Another, less common, founder objection is: well, if necessary we will just do a down round. This ignores that down rounds are incredibly hard to do. My partner Albert wrote this a few weeks ago.

Fundraising advice: Don’t over optimise on terms

The Equity Kicker

They will most probably go on to raise multiple rounds of venture capital after all. And don’t forget the prime directive of fundraising strategy: set things up so that you never do a down round. The badness of a down round is difficult to overstate; in fact, the threat of that is the best reason not to take a super high price when you’re offered one. If you raise at such a price, everything has to go perfectly in order for your next round to be an up one.

What Did And Did Not Happen In 2016

A VC : Venture Capital and Technology

I predicted “markdown mania” would hit the tech sector hard and employees would start getting cold feet on startups as they saw the value of their options going down. There was some of that and employees are certainly more attuned to how they can get hurt in a down round or recap, but the tech sector has also used a lot of techniques, including repricing options, reloading option plans, and moving to RSUs, to mitigate this.

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Spreadsheets in legal documents

The Equity Kicker

I’ve been here before too, when implementing anti-dilution clauses after down-rounds. I have spent a considerable part of today translating the equalisation clauses in our Limited Partnership Agreement into formulas in a spreadsheet.

Quote Of The Day

Altgate

Why I Canceled My CO2stats Account → Quote Of The Day Posted on January 9, 2009 by fnazeeri We intend to continue forward and be very supportive of your down rounds this year.&#

Pro-rata Rights For Angels

Ask The VC

When VCs invest in rounds, they set a threshold for “major investors” and, if you aren’t a major investor, you lose your pro-rata rights. I did also when I invested as an angel, although my angel strategy was to invest in only the first two rounds. As an angel, I’d do the seed round, then one more round if needed, and then I’d stop. I know many VC investors who aggressively cut angels out of the pro-rata rights in later rounds.

Venture Outlook 2016

Both Sides of the Table

On the chart below, 78% of the rounds of 80 $1bn+ companies were led by non VCs. Here is a chart to show you the median valuation of late stage private tech companies compared to traditional growth rounds of capital led by VCs and also vs. the public markets. 25% “down rounds?

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Dilution concerns by founders and investors

Taffy Williams

For this reason, capital raises should take place with increased valuation increments; e.g., the last shareholders bought at $1 / share, the next round is at $5 /share. Terms like “cram-down” or “down-round” originated from such events over the last 10 years or so.

Professional Investors Qualms About Crowdfunding

Startup Professionals Musings

I would summarize the views and qualms from professional investors as the following: Crowdfunding platform costs could trickle down to angel groups. Later funding rounds can’t deal with a thousand shareholders.

What Do Industry Insiders Think Will Happen in VC in 2016?

Both Sides of the Table

So why the slow down all of a sudden? 61% of VCs said valuations were “marginally down” in Q4 of 2015 but 91% expect price decreases in the next two quarters. Most flat rounds. More down rounds. More structured rounds.

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What is actually happening during a VC slowdown?

This is going to be BIG.

Fear, not surprisingly, weighs markets down. They might have to get another round in, and that round will most certainly be a down round. The public markets have been stumbling around lately, trying to figure out what China and oil prices mean for the rest of the world economy. That uncertainty creates fear--and in a US Presidential Election where fear is the debate topic de jour, we've got plenty of that to go around.

On the Road to Recap:

abovethecrowd.com

John was the first to uncover that just because a company can raise money from a handful of investors at a very high price, it does not guarantee (i) everything is going well at the company, or (ii) those shares are permanently worth the last round valuation. With the public markets down, these groups began writing down Unicorn valuations. The last round is not the permanent price, and being private does not mean you get a free pass on scrutiny.

On the Square and Match IPOs and hopes for a correction

The Equity Kicker

So the share price has been trending down for some time before popping after the IPO. I say that because investors in the $6bn round in Square have still made money on the deal. Match.com and Square both enjoyed strong first days after their IPOs yesterday.

Why Raising Too Much Money Can Harm Your Startup

Both Sides of the Table

I understand this instinct for more capital and I have two very different personal experiences: In my first company we raised an A-round of $16.5 And if you raise the “5 on 20” and don’t grow into your next-round valuation you’re stuck because venture investors HATE doing down rounds.

Bad Notes on Venture Capital

Both Sides of the Table

We raised a seed round. You’ll find out the minimum when the next round is raised. At an accelerator … Me: Raising convertible notes as a seed round is one of the biggest disservices our industry has done to entrepreneurs since 2001-2003 when there were “full ratchets” and “multiple liquidation preferences” – the most hostile terms anybody found in term sheets 10 years ago. How will you price the next round? Your A round?

Bad Notes on VC

Gust

We raised a seed round. You’ll find out the minimum when the next round is raised. Me: Raising convertible notes as a seed round is one of the biggest disservices our industry has done to entrepreneurs since 2001-2003 when there were “full ratchets” and “multiple liquidation preferences” – the most hostile terms anybody found in term sheets 10 years ago. Him: But when I raised my first round we didn’t know how to price the company. How will you price the next round?

Changes in the Venture Capital Funding Environment

Both Sides of the Table

In other words, it isn’t that VCs suddenly got smart, it’s that the costs of starting a company went down dramatically. I Leaderless Rounds. Non VC Growth Rounds. The market eventually slowed down. 3VCs agreed to fund an inside round and cut costs.

Analyzing Boston's Reindeer (Not Unicorns)

Seeing Both Sides

Yelp is down 49% YTD, Box is down 41%, Hortonworks is down 24%). A few years ago, I did an analysis on the Boston-based companies that were worth more than $500 million in value, which I called Boston Unicorns.

6 Areas a startup CEO must learn

Taffy Williams

Running out of money is not something to experience, unless you enjoy the pain of a severe down round or closure of a business. Identify milestones & meet timelines – Milestones are defined prior to raising the first rounds of capital. CEOs must learn to wear many Hats!

An Inside Scoop on the Funding Environment and What it Might Mean for You

Both Sides of the Table

Six firms had expressed strong interest, two had strong champions already trying to test price and round size and one had made it clear they were planning to submit a term sheet the following week. With “uncertainty” taking hold, rounds were taking longer to complete.

A Recently Exited Founder on Surviving the Contradictory Role of Startup CEO

View from Seed

I called the recruiter running the search and told him I was going to step down and hire a CEO. Other CEOs are the only people you can sit down and talk with about the hardest parts of your job.

The downside of accelerated investment decisions

Chris Dixon

Sadly, founders with bad investors will likely face punishing down rounds, key employees being indiscriminately fired, and elaborate financial shenanigans engineered to dilute founders and seed investors. There has been a lot of talk about how early-stage valuations have risen dramatically over the past few years. Financially, this is probably good for founders and bad for investors. But a side effect of this frothy market is that financings are occurring much faster.

How do VCs measure their success (and why you should care)?

Hippoland

Primarily these things: Companies dissolvingCompanies exitingCompanies raising equity rounds All of these events are concrete events that attach a numerical value to a company. And, lastly, when companies raise an equity round, there is another investor who has (in theory) done due diligence and assessed that a company is worth a certain amount. If a company raises a good round, it gets marked up to the new value. And if a company takes a down-round, it gets marked down.

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Keep Term Sheets Simple for Quicker Cash to Spend

Gust

Venture capitalists and later round investors like the preferred convertible shares. This clause attempts to protect the conversion price of stock of angel investors, prior to additional financing, from being reduced to a price equal to the price per share paid in a later “downround.

The VC Death Trap

Rob Go

Let’s that fund invests 1/3 of the capital into the initial rounds. What IS problematic is putting a lot more capital into follow-on rounds for a company that ends up not working. A fancy firm puts down a term sheet to invest $40M in the new company.

Capital Market Climate Change

Ben's Blog

Had you not had the experience of raising your last round so easily, you might have seen this round coming. As if the price could never go down. When you go to fundraise, you will need to consider the possibility of a valuation lower than the valuation of your last round, i.e., the dreaded down round. Down rounds are bad and hit founders disproportionately hard, but they are not as bad as bankruptcy. Yes, we did a down round.

Why Startups Should Raise Money at the Top End of Normal

Both Sides of the Table

If you invested in the first angel round of a startup company it is usually very hard to sell your stock – usually for many years if ever at all. So rounds tend to be “range bound&# where the top end of the valuation spectrum often being done in boom markets (i.e.

Anti-Dilution Provisions - An Example

Recent Buzzes - VC Experts, Inc.

Anti-Dilution provisions can be a key negotiating point when it comes to the Deal Terms of a new round of financing, especially in the presence of a. Down Round. By VC Experts Analyst Team. Broad Based Weighted Average can be a more friendly provision as compared to. Full Ratchet when it comes to the effects of equity % held by early investors and founders. See how these terms can differ when it comes to the structure of the. Cap Table and also at exit in the Waterfall.

Penis envy: why you too should raise a massive Series A

Fred Destin

If you're going to have a down round, make it count.

Sustainable startup growth and venture capital

The Equity Kicker

However severe our current situation is, I’m sure there will be plenty of short term negatives, including more job losses, company failures and down rounds. That means much less blitzscaling (whatever the heck that ever was), and lots more heads-down quality thinking to build products that customers actually want and will eventually pay for. I think that’s why you see people like Bill Gurley, Fred Wilson and Mark Suster publicly talking markets down.