SAN FRANCISCO, Nov. 9, 2006 (PRIMEZONE) -- Venture capital deal terms are becoming far more company friendly than they were four years ago, as investors vie to fund the most promising entrepreneurial companies in the market, according to the latest edition of the VentureOne Deal Terms Report, published by Dow Jones & Company.
The fourth edition of the report shows steady improvement in the terms younger companies are negotiating into their venture capital term sheets, including improved liquidation preferences and selling a smaller percentage of ownership to investors. However, some older companies negotiating later rounds are still facing more onerous terms. The report covers a 15-month period from April 2005 through June 2006 and surveyed more than 350 companies in the U.S. and Europe.
"Since our first report in 2003, there has been a wider discussion of deal terms that has helped investors and entrepreneurs fend off some of the worst practices of 2001 and 2002," said Russ Garland, the editor of Venture Capital Analyst: Technology and author of the report. "A saner investment climate has led to healthier companies who are better able to negotiate more favorable terms."
Among the key findings in the report:
-- The median share of U.S.-based companies sold to investors
in Series A rounds fell from 50% in last year's study to
40% this year. Because first round valuations held relatively
steady during the survey period, this appears to be the
result of companies raising smaller first rounds.
-- Liquidation preferences improved as no U.S.-based companies
this year were required to agree to liquidation preferences
in excess of three times the investment. In addition, 82%
of the U.S. companies reported liquidation preferences
that were equal to only one times capital investment plus
accrued interest, up from 73% of the companies in last
year's study. Higher multiples were reported mostly by
companies closing third or later rounds.
-- The majority of U.S. companies closing second
rounds -- 80% -- saw an increase in their premoney valuation,
up from 73% that did so in the previous year's study.
-- Full-ratchet dilution protection -- a deal term that achieved
notoriety after the tech bubble -- has become less common.
Only 19% of U.S. respondents reported having this in their
term sheets, down from 22% last year. In 2002, 34% of
anti-dilution provisions were the full-ratchet variety,
which require a company closing a subsequent down round
to fully adjust the price of the prior investors' shares
to compensate for the company's lower valuation.
To order a copy of the report, please call (877) 633-8663 or go to: http://www.venturecapital.dowjones.com/products/prod_dt_report.html.
About VentureOne
Dow Jones VentureOne (www.ventureone.com and www.venturecapital.dowjones.com), a unit of Dow Jones Financial Information Services, has been the leading provider of finance and investment data to the venture capital industry for almost 20 years. Dow Jones VentureSource, a sophisticated electronic database on the venture capital industry, is published by VentureOne.
About Dow Jones Financial Information Services
Through its Financial Information Services group, Dow Jones produces focused, sector-specific online databases, newsletters and industry events for the private equity, venture capital and diversified markets. Newsletters published include Private Equity Analyst, VentureWire Professional and Daily Bankruptcy Review. In addition, Dow Jones & Company (NYSE:DJ) (www.dowjones.com) publishes the global Wall Street Journal with its international and online editions; Barron's; the Far Eastern Economic Review; Dow Jones Newswires and Indexes; MarketWatch; and Ottaway newspapers. Dow Jones co-owns Factiva with Reuters and SmartMoney with Hearst. Dow Jones also provides news content to CNBC and U.S. radio stations.