THE FUTURE OF HIGH TECH STARTUPS
Investments by Venture Capitalists in 2000 v. 2001
The number of companies funded by VC’s:
• 7,094 (with 842 in telecom) in 2000
• 3,928 (with 484 in telecom) in 2001
Total Amount Invested in U.S. down 63%:
• $99.6 billion in 2000
– $17.9 billion in telecom
• $36.5 billion in 2001
– $5.9 billion in telecom
Average Investment Size:
• Approximately $14.0 million in 2000
$21.3 million in telecom
• Approximately $9.3 million in 2001
$12.2 million in telecom
Small Growth in 4Q over 3Q 2001:
• $7.1 billion invested in 4Q2001 • $7.0 billion invested in 3Q2001 • 856 companies funded in 4Q2001 • 810 companies funded in 3Q2001
SAMPLE TERMS FOR VENTURE CAPITAL EARLY ROUND INVESTMENTS DURING AND AFTER THE INTERNET BUBBLE TERM
CLOSING
BEFORE
1-2 month cycle, single closing
AFTER
3-5 month cycle, tranches based on milestones
TERM
Dividends
BEFORE
None, or non-
AFTER
Mandatory,
cumulative payable when, as and if declared by Board
cumulative 8% per year
TERM
Liquidation Preferences
BEFORE
Original purchase price plus accrued dividends, and participation with common stock with cap
AFTER
Multiple of 2-3x original purchase price plus participation with common stock
TERM
Redemption
BEFORE
None
AFTER
At option of holders, up to 50% in 5 years and remaining 50% in 6 years at purchase price plus accrued dividends
TERM
Automatic Conversion
BEFORE
Qualified IPO with no per share price limit
AFTER
Qualified IPO of at least 5x purchase price
TERM
AntiDilution
BEFORE
Standard broad-based weighted average anti-dilution
AFTER
Same
TERM
Voting Rights
BEFORE
Investors must approve: change of rights, creation of senior securities, payment of dividends, liquidation
AFTER
Investors must approve: change of rights, creation of senior or pari passu securities; payment of dividends, liquidation, board size, merger, consolidation or acquisition, redemption, debt or other
TERM
Board Seats
BEFORE
2-3 Investors; 2-3 Common Stock; 1 outsider
AFTER
Same
TERM
Preemptive Rights
BEFORE
Right to maintain pro rata ownership
AFTER
Same
TERM
Pay to Play
BEFORE
None
AFTER
Preferred loses antidilution if don’t participate in later down round, or preferred converts to common if don’t participate in later down round
TERM
Right of First Refusal
BEFORE
Investors have right to purchase shares not purchased by Company to be sold by other shareholders
AFTER
Same
TERM
Co-Sale Rights
BEFORE
None or limited to right to sell with founder who sells shares
AFTER
Right to sell with founder or any other shareholder (other than another investor) whosells shares
TERM
Drag-Along Rights
BEFORE
None
AFTER
Right to force shareholders to approve sale of company upon Board and majority shareholder approval
TERM
Registration Rights
BEFORE
Two demand rights after IPO, piggyback rights subject to cutback, S-3 rights
AFTER
Two demand rights on earlier of 4-5 years of closing or following IPO, piggyback rights subject to cutback, S-3 rights
TERM
Founder Vesting
BEFORE
Portion up front, 2-4 year vesting
AFTER
Same
TERM
Employment Agreements
BEFORE
None
AFTER
May have with founders, key technical employees
TERM
Information Rights
BEFORE
Quarterly and annual financial statements
AFTER
Monthly, quarterly and annual financial statements, annual business plan and budget