Center for Management of Emerging Companies

Preparing a Business Plan - Guidelines for Professional Legal Advisors

This month's post is a chapter on Preparing a Business Plan written with AiMinh Nguyen that will appear in an upcoming book for professional legal advisor published by the American Bar Association--Emerging Companies Guide 2d Edition. 

Wilson Sonsini Term Sheet Generator

Wilson Sonsini Goodrich & Rosati, which has long been considered one of the leading law firms for venture-backed businesses, recently launched an innovative (and free) tool called the WSGR Term Sheet Generator.  Users can generate their own model term sheet for a venture capital financing by answering a series of online questions and can access annotations prepared by the firm explaining the significance of various issues.  Links are also available to reports that include market data on venture financings that has been collected by the firm during the course of its extensive representation of entrepreneurs and venture capitalists.  It's worth checking out!

Do Your Homework on Your Venture Capitalist

It used to be that entrepreneurs looking for venture capital financing were the ones who had to bear the lion’s share of due diligence and personal scrutiny.  Since most venture capitalists invested in people as much as in products or markets they would often commission detailed background checks on founders that focused on common problems areas such as misrepresentations of employment background, failure to disclose personal issues that might be indicative of character, and a history of litigation or other legal issues (i.e., bankruptcy or DUI convictions).  The concerns of the venture capitalists are understandable given the large sums of money that are in play when an investment decision is made; however, entrepreneurs often felt beaten and battered by the process, particularly when venture capitalists made aggressive demands regarding the terms of the deal and management of the company once the funding was completed.  Recently though entrepreneurs have been provided with a vehicle for leveling the playing field and gathering their own information on prospective financial partners before moving too far down the long road that often needs to be traveled before a venture deal is closed.  The answer?  It’s a new web site called TheFunded.com: The Resource for Entrepreneurs

As noted in an August 7, 2007 article in the Wall Street Journal titled Web Site Puts the ‘Vent’ into Venture Capital: “TheFunded lets entrepreneurs rate venture firms according to five different criteria (track record, operating competence, pitching efficiency, favorable deal terms and execution assistance) and also write reviews of firms and their individual partners.”  Currently membership is screened and limited to current and former founders and CEOs of companies, as well as some senior managers.  Current founders and CEOs can use the site for free while others pay a modest annual membership fee.  Members get to see the entire content of postings while visitors get to see the first few sentences—which may be loaded with feedback that is not welcome public disclosure for venture capitalists.

Q1 2007 Survey of Private Company Financing Terms

Cooley Godward Kronish, one of the leading law firm players in the venture capital market, released its latest report on select deal terms for private company financings in which it participated that closed during the six quarters ending the first quarter of 2007.  Some of the key findings include the following:

• When deals were broken down by series (i.e., Series A, Series B, etc.), there was a fairly consistent level of funding for later stages; however, during the first quarter of 2007 there was a shift in early stage financings from Series B to Series A.  In fact, Series A deals accounted for 41% of the transactions in Q1 2007, which was an increase from 32% in the previous quarter.
• Median pre-money valuations increased in Series A financings—from $6 million in Q4 2006 to $9 million in Q1 2007—and remained steady at $25 million from quarter to quarter for Series B financings.  On the other hand, pre-money valuations in later round deals completed in Q1 2007 fell appreciably from levels experienced in 2006 (e.g., Series D median valuations fell from $70 million in Q4 2006 to $44 million in Q1 2007).
• In most cases, regardless of the series, the negotiated liquidation preference was 1X (e.g., 91% of the Series A financings) although there was a modest increase in greater liquidation preferences for Series D or later financings (i.e., 23% of the deals had a liquidation preference of greater than 1X).
• Series A financings had the highest percentage (50%) of non-participating preferred terms (i.e., holders of preferred shares had no right to participate in distributions while owning those shares beyond their 1X liquidation preference).  There was a greater likelihood of uncapped or high capped participation in later round deals.
• While the percentage of up-round financings in Q1 2007 was still high (68%), it was substantially less than a year earlier in Q1 2006 (88%).

All in all, the survey gives an indication that the start-up and early stage market remains strong with valuations holding steady and companies being able to fend off demands by investors for more protection with respect to liquidation preferences and participation.