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VENTURE CAPITAL FINANCING:
DOWN ROUNDS AND CRAM-DOWN FINANCINGS
SEPTEMBER 2004
CURTIS L. MO
WEIL, GOTSHAL & MANGES LLP
REDWOOD SHORES, CALIFORNIA
Copyright © 2004
All Rights Reserved.
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OUTLINE SUMMARY
Page I.INVESTOR FAVORABLE TERMS........................1 B.Enhanced Liquidation Preferences................5
1.High Liquidation Preferences............5
2.Participating Preferred Stock.............7
C.Price Protection Provisions............................8
1.Broad-Based Weighted Average
2.Narrow-Based Weighted Average
3.Full Ratchet Adjustment...................12
4.Pay-to-Play Provisions......................13
2.Redemption Price.............................18
E.Protective Provisions....................................20 F.Staggered Financings...................................24
II.DOWN ROUNDS AND "WASHOUT" AND
CRAM-DOWN FINANCINGS...........................................26 A.Down Rounds..............................................26
2.Anti-Dilution Protection...................28
3.More Favorable Terms.....................29
4.Under Water Securities.....................29
5.Corporate Changes...........................31
B."Washout" and Cram-Down Financings.......32
1.Market Checks..................................37
2.Explore Alternatives to Financing.....38
3.Financial Advisor or Appraisal.........38
4.Disinterested New Investors.............38
5.Special Committees..........................39
6.Stockholder Approval.......................41
7.Rights Offering.................................42
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8.Improved Terms...............................43
9.Written Record.................................43
APPENDIX A....................................................................45 APPENDIX B....................................................................61
ILLUSTRATION OF ANTI-DILUTION
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VENTURE CAPITAL FINANCING:
CURRENT TERMS, DOWN-ROUNDS AND CRAM-
DOWN FINANCINGS
CURTIS L. MO
1
WEIL, GOTSHAL & MANGES LLP
REDWOOD SHORES, CALIFORNIA
This outline provides a brief, practical summary of terms and conditions encountered in venture capital financings of private companies, including in so-called "down rounds" and "washout" or "cram-down" financings. Tax and accounting considerations are beyond the purview of this outline, and we urge you to consult with specialists in those areas in considering these issues. The below represents the views of the authors, and not necessarily those of Weil, Gotshal & Manges LLP. Although every effort has been made to provide accurate information in these materials, neither Weil, Gotshal & Manges LLP, nor any of its members make any warranty, expressed or implied, or assume any legal liability or responsibility for the accuracy or completeness of any information contained herein.
I. INVESTOR FAVORABLE TERMS
Beginning in mid-2000, the public equity
capital markets experienced a major slowdown, sending public company valuations substantially lower. The related loss of investor confidence, uncertainty in the financial markets, and sudden sell off in entire sectors including the Internet "bubble burst," rippled through the venture capital market as 1 The author would like to gratefully acknowledge the invaluable assistance of Peter S. Buckland a Corporate Associate at Weil, Gotshal & Manges LLP, Redwood Shores, California, in the preparation of this article.
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investors weighed whether, when and how to resume investing in the turbulent market.
As a result, venture capital investors were
forced to reevaluate existing portfolio companies and to determine which should survive and which should be liquidated or otherwise shut down. The surviving companies faced a distressed financing market and those not luckly enough to have substantial capitalquotesdbs_dbs2.pdfusesText_3
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