Investors Receive Reasonably Strong Downside Protections but Few Upside Terms; Highest Value Unicorns Implementing Super Common Stock Voting Structures
Fenwick & West, one of the nation’s premier law firms providing comprehensive legal services to high technology and life science clients, today announced the results of its first survey of the terms of Unicorn financings. A "Unicorn" is a venture capital backed company that closed a financing at a valuation above $1 billion.
The survey analyzed the terms of financings for 37 US based venture backed companies that raised money at a valuation of at least $1 billion in the 12 months ending March 31, 2015.
"As has been well discussed, a number of venture backed companies are receiving very high valuations, some in the tens of billions of dollars. However, as investors in these financings generally receive preferred stock for their investment, which can have very different and preferable terms than the common stock issued to public shareholders in an IPO, we have analyzed these preferred stock terms to provide a better understanding of their nature", said Barry Kramer, co-author of the survey and a partner in the corporate group of Fenwick & West.
"For example, 100% of Unicorn financings provided investors with a liquidation preference, which provided the Unicorn investors with the right to receive their money back prior to any distributions to founders or management if the company was acquired at a price less than that paid by the investor. However, only 30% of Unicorn financings provided investors with significant protection if the company went public at a price below what the investor paid", continued Kramer.
"While these provisions provided investors with reasonably good downside protection if the company's value declined, especially in an acquisition, investors in Unicorns received very few upside benefits, i.e. provisions that increased the likelihood that they would make a gain on their investment. For example, cumulative dividends, participating preferred, multiple liquidation preference and IPO auto convert provisions above the investment price were generally used in less than 10% of deals", said Michael Patrick, also a partner in the corporate group and a co-author of the survey.
"And we also note that in 70% of the top 10 highest valuation Unicorns, the company had implemented a dual class super voting common stock structure to provide additional voting rights to founders/management, early investors and/or later stage private investors, if the company went public”, continued Patrick.
Complete results of the survey with related discussion are posted on Fenwick & West’s website at www.fenwick.com/unicornsurvey?.