For the Terms they are A-Changin’

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I remember what it was to be an early stage startup raising capital prior to the current bull cycle we find ourselves in. First, capital raising was more difficult than it has been recently and still is now. Second, valuations were not as high as they are now, nor were the amounts raised per round. Third, and not insignificantly, the other terms were much more investor friendly. The ones other than valuation and amount raised. The ones most claim to pay attention to and understand but few do.

I remember a time when:

a) anti dilution provisions were much harsher than the current middle of the road “weighed average ratchet”,

b) liquidation preferences were much dearer than the neutral 1x,

c) investors would have the right to participate in the sales proceeds after their liquidation preference as opposed to the non participating rights they currently settle with most of the time,

d) protective provisions that define what management can do without board/shareholder consent were much more granular and tighter than they are now,

e) drag along rights were solely triggered by investors as opposed to both common stockholders and investors,

f) reverse vesting of founder shares was the norm,

g) board control by investors was a given,

h) valuation adjustments triggered by missed revenue projections were successfully negotiated by investors,

i) cumulative preferred dividends as opposed to non-cumulative currently.

Any other material terms I have missed? Please chime in.

Any geographic differences where what is market varies, e.g. US vs UK or rest of Europe? Please chime in.

I am starting to read and hear about these “other” terms and how investors are now pushing the dial in their favor for some of them. As this current bull cycle ends – when, I have no clue – I fully expect startups to encounter an environment which will start to be more “investor” friendly. Valuations may rise and fall, capital raised may fluctuate too and startups founders will adjust. These “other” terms will require more fundamental adjustments though. To start with, if an angel or VC investor negotiates more control, more economic upside or protection, a startup will have to rethink its fund raising strategy as well as use of funds going forward by being more conservative and will have to put forth more grounded forecasts – I would use the word “more realistic”. Second, tighter terms automatically force a startup to be more “selective” to the extent it can in a market environment where investors will also be more selective. By that I mean, if investors yield more power then it is even more imperative to choose investors one is truly in sync with, investors with a sterling reputation who will treat you right when turbulence arises.

Pascal Bouvier

Life and work experiences have given Pascal an unmatched vantage point, seeing things as both venture capitalist and aspiring entrepreneur. He currently is a Venture Partner with Santander Innoventures – Santander Group’s Global Fintech fund.

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