Wilson Sonsini published its 1H 2018 edition of The Entrepreneurs Report, and to sum it up, valuations remained strong. Wilson Sonsini’s report indicates that the trend towards larger deal sizes continued, but there was a decrease in the volume of transactions. The report analyzed the data on venture financing transactions in which the firm was involved during 1H 2018. The key highlights of the report are as follows:
The proportion of up-round financings dropped significantly in Q2 2018, falling from 81% in Q1 2018 to 68% of all financings in Q2 2018. The share of down round financings went up sharply, from 7% in Q1 2018 to 18% in Q2 2018. Flat rounds were also more common in Q2 2018 than in prior quarters, up from 11% in Q1 2018 to 15% of all financings in Q2 2018. An increasing number of later stage companies that have failed to meet investors’ high expectations have had no choice but to raise money at flat or lower valuations.
As in 2017, about one-third (35%) of post-Series A rounds used senior liquidation preferences in 1H 2018, with pari passu liquidation preferences increasing slightly from 62% of all such rounds in 2017 to 65% in 1H 2018. However, the percentage of down rounds with senior liquidation preferences dropped dramatically, from 63% in 2017 to 25% in 1H 2018; meanwhile, the percentage of down rounds with pari passu preferences nearly doubled, from 38% in 2017 to 75% in 1H 2018.
The percentage of financings with no participation increased slightly from 84% in 2017 to 86% in 1H 2018, but the total represents a higher percentage than in any of the previous five full years.
In Q2 2018, there were fewer bridge loans than in Q1 2018. The median amount raised in pre-Series A bridges increased significantly, rising from $0.29 million in Q1 2018 to a record high of $1.00 million in Q2 2018, due to large amount of funding available for early stage companies. In contrast, the median amount raised in post-Series A bridges fell from $1.35 million in Q1 2018 to $1.00 million in Q2 2018, well under the five-year median of $1.50 million.
Maturity periods increased for pre-Series A bridge loans in 1H 2018, as did interest rates. The percentage of pre-Series A loans with maturity periods of 12 or more months increased from 77% in 2017 to 100% in 1H 2018, and the percentage of loans with interest rates of at least 8% also increased, from 25% in 2017 to 41% in 1H 2018. The percentage of post-Series A loans with maturity periods of 12 or more months increased from 60% in 2017 to 75% in 1H 2018, with 43% of loans having interest rates of at least 8%, as compared to 44% in 2017.
What does this all mean for values generally and 409A specifically? For companies that have recently raised money on higher valuations, we would expect that a reasonable application of the OPM Backsolve method will result in higher fair market value determinations.
Contact us today to learn how the venture capital financing market may impact the value of your company and the price at which you issue options!
Wilson Sonsini’s report (The Entrepreneurs Report – 1H 2018) can be found here: https://www.wsgr.com/en/insights/the-entrepreneurs-report-private-company-financing-trends-1h-2018.html
