Previously we talked about the seed investment terms and trends from 2011. A lot of things have changed since then, and I thought a refresher course was in order. To help me with this post, I leveraged the research done by my friends at Silicon Legal, a leading Silicon Valley law firm, in their 2014 Seed Financing Report, which includes the financing data from over 203 companies that raised $3MM or under in their first professional round in 2014.
- Seed investors are starting to behave like later-stage venture investors, by asking for key control and downside and pro-rata rights protections
- Terms in the last three years have become a lot more “founder friendly”
- 41 percent of seed investors are investing in later stage rounds, desiring to protect their ownership percentages from future dilution, 22 percent of which also looking at later stage deals as their first investments
- The startup accelerator, Y Combinator, has pioneered a new investment vehicle called SAFE (Simple Agreement for Future Equity). It is convertible into next equity round, but is not a debt instrument (no interest and no due date).
- “Party rounds” continue to proliferate with an average of 9-11 investors investing in the round, with some deals seeing as many as 20 investors).
- Crowdfunding platform, AngelList, helped make papering multi-investor rounds a lot easier and faster with the launch of their syndication model (helping to rally up investors and lower legal costs)
AVERAGE EQUITY TERMS
- $7.5MM median valution in 2014 (vs. $7.2MM in 2013 and $6MM in 2012)
- $2MM median dollars raised
- 92 percent included board seats (84 percent of which was one seat)
- 95 percent had pre-emptive pro rata rights for future investments (58 percent of which had a $100K future raise threshold before kicking in)
- 97 percent was not a participating preferred structure
- 99 percent had a 1x liquidation preference, paid back before others
- 85 percent had anti-dilution protection, in the event future down rounds
- 88 percent had rights of first refusal and co-sale rights (for any sales of shares)
- 82 percent had drag along rights for majority shareholders (to require minorities to follow their lead)
- 100 percent had other standard protective provisions
AVERAGE CONVERTIBLE NOTE TERMS
- $7MM median valuation cap (vs. $6MM last year)
- $950K median dollars raised (50 percent over $1MM; 25 percent $500K-$1MM; 25 percent under $500K)
- 84 percent with a term of 12 to 24 months
- 65 percent with an interest rate of 4-8 percent
- 65 percent with a 20 percent valuation discount to the next round
- 84 percent automatically convert to equity at time of an acquisition
- 78 percent have no change in control premiums (but 20 percent did for up to 2x)
- 68 percent allow for conversion to equity at time of maturity
- 25 percent allowed for pre-emptive pro rata investment rights
- 15 percent allowed for most favored nation revisions (if any future rounds at better terms)
- They typically no longer come with warrant coverage for additional equity
- There are no veto rights offered on any change in control scenarios
- These notes do not typically secure the assets of the company or its founders
- These notes typically do not come with board seats
For those of you interested in the new SAFE structure. They were typically $500K in size at a median $5MM valuation cap (including a 20 percent discount to the next round) and included pro-rata pre-emptive rights and change in control protection (at a zero to 100 percent premium).
So, when you are out doing your fund-raising, use the above data as benchmarks for your own financing. And, enjoy the more founder-friendly terms while they last.