Multimarket Venture Capital Terms Survey: Q4 2003 (Fish & Richardson PC)

Jonathan Aberman and David Dutil, Fish & Richardson PC

Set forth below are our findings based on a review of the 164 publicly-reported venture capital financings that took place in five regions during the fourth quarter of 2003. We looked at financings in the Mid-Atlantic, New York Metro, New England, Southwest, and Southern California regions.

Financing Round

The financings we reviewed ran the gamut from Series A to Series K with the distribution as follows:

Series Current Quarter
A 25%
B 34%
C 23%
D or later 18%

Price Direction

Less than half of the financings were Down Rounds:

Price Change Current Quarter
Down 45%
Unchanged 16%
Up 37%

Down Rounds

Down Rounds were more prevalent in late stage financings:

Price Change Current Quarter
B 32%
C 55%
D or later 55%

Cumulative Dividends

Cumulative Dividends were present in approximately half of the transactions, although there was significant regional variation:

Current Quarter

There was a slightly greater tendency in later rounds to include Cumulative Dividends:

Series Current Quarter
A 51%
B 45%
C 42%
D or later 41%

Liquidation Preferences

Preference Multiples

Each financing had a Liquidation Preference for the most recent round that was at least pari passu with previous rounds, and in almost every case the latest round was senior to previous rounds. The preference multiples had the following distribution:

Liquidation Preference Current Quarter
1X 80%
1X - 2X 11%
2X-3X 9%


While the Liquidation Preference multiples were fairly low, almost every deal included participation for the most senior series of Preferred Stock:

Current Quarter


Mandatory or Voluntary Redemption was generally present, although there was significant regional variation:

Current Quarter


Full Ratchet Antidilution Protection was rarely used; a few deals had no Antidilution Price Protection:

Antidilution Type Current Quarter
Full Ratchet 19%
Weighted Average 78%

Pay to Play

About one in five deals included a Pay to Play provision. Such deals were divided between those that forced conversion to Common Stock versus those that forced conversion to a shadow Preferred Stock:

Conversion to Current Quarter
Common Stock 16%
Shadow Preferred 5%

Corporate Reorganization/Recapitalization

A few of the transactions we reviewed included a Reorganization or Recapitalization where the outstanding capital of the company was significantly changed at the time of the financing.

Current Quarter

The two types of reorganizations that we found were (1) reverse splits (aka combinations), which were present as follows:

Current Quarter

and (2) forced conversion of senior securities into junior securities:

Current Quarter


The big news this quarter is the reemergence of the single liquidation preference. More than any other factor we have discussed with our friends and clients, or seen in the data, the relative demise of multiple liquidation preferences is reflective of a more upbeat investment climate for venture capital. We also suspect that in many instances competition for deals has resulted in a loosening of terms, when compared to the last few years. Another supporting factor is that down rounds constituted less than half of all financings during the last quarter of 2003. Full Ratchet Antidilution protection is also declining in frequency. Interestingly, we actually identified a few deals where the investors received no Antidilution Price Protection at all.

Since we looked at data across a number of markets, we were also struck by regional distinctions. The deal terms in Southern California, for example, appear to be more influenced by trends in Silicon Valley than by investment patterns in Boston, so geography seems to be more important than industry in influencing terms. Observers have often commented that there are differences in philosophy between West Coast and East Coast financings, and the data would support that, in particular with respect to current requirements for cumulative dividends or redemptions.

Aggregate investment amount data for the fourth quarter suggested that the decline in investment over the last few years has slowed, and the quarter to quarter investment trend is up. Our anecdotal evidence is that the first quarter will continue this upward trend, and we are optimistic that the aggregate data for 2004 will show an increase over 2003. While we are not blowing bubbles, there is reason to be optimistic. And, for those of us in the industry that remember the last few years, that may be the biggest story of all.


We reviewed 164 Preferred Stock investments made by venture capitalists within the regions broken down on the following pages during the period October 1, 2003 - December 31, 2003. For preparation of our survey we examined publicly available sources and gathered additional information and insights on a confidential basis from market participants.

We counted an Antidilution Protection as Full Ratchet even if the ratchet expired after a condition, such as the passage of time, was met. In addition, we did not break down whether Weighted Average Antidilution was Broad or Narrow.

Percentages in the charts may not add up to 100% due to rounding.

Please see the attached glossary for an explanation of the terms used in this survey.

For further information Please contact Jonathan Aberman (; (202) 626-7703) or David Dutil (; (202) 626-7702). Jonathan and David are attorneys at the Washington, DC office of Fish & Richardson P.C.

Full Report

The entire report, including the full data from the 5 regions below, is available in The Encyclopedia of Private Equity and Venture Capital.

Table of Contents

Mid-Atlantic Venture Capital Survey
NY Metro Venture Capital Survey
New England Venture Capital Survey
Southwest Venture Capital Survey
Southern California Venture Capital Survey
Venture Capital Glossary

VC Experts encourages use of its forums and solicits points of view, information, alerts, red flags, etc., on new state, county and municipal taxes which should be taken into account. To the extent the taxpayer has the opportunity to alter its business model, it may be advisable to do so in order to avoid fees and taxes which, while perhaps small taken in isolation, can aggregate a big number when taken cumulatively. We are interested as well in comment on severity of the penalties if the taxpayer and the state wind up disagreeing in the applicability and enforceability of the tax . and the taxpayer loses. We are quick to say that the collection of taxes is a serious business. We hope to have shortly a piece by a senior contributing editor discussing the ins and outs of withholding tax payments; interest was piqued by a recent newspaper report of a criminal proceeding which sent a chronic offender to jail for a non-payment of withholding taxes. [1]

I will get the ball rolling with remarks on a recent court case involving a nuisance requirement (one we have known about for a long time) in New York State for limited liability companies doing business in New York. The Court in Barklee Realty Co. v. Pataki upheld the constitutionality of a statute requiring LLCs doing business in New York to go to the expense of publishing their existence in the newspapers. The Court below agreed that:

"the required manner of publication of a limited liability company's articles is costly, unnecessary and an ineffective method of getting the desired information to members of the public. [However] it was for the Legislature alone to assess the wisdom and utility of publication as a means of disseminating such information:"

In fact, the publication requirement imposes several thousand dollars of expense on LLC's doing business in New York . unnecessary expense. However, it helps the local newspapers which are currently in a bind in the face of falling advertising. The risk in this instance of not publishing is of course, a matter for the managers' business judgment.

The Court's opinion hopefully outlines the risks . and the faux risks.

"As previously noted, failure to comply with the publication requirement would not impair the validity of any contract or act of the limited liability company; would not prevent a limited liability company from defending itself in court; and should not affect the limited liability of its members, although, from a practical standpoint, a limited liability company might be hampered in some of its dealings, particularly where an opinion of counsel that the limited liability company had been validly formed is required (Bruce A. Rich, Practice Commentaries to Article II of Limited Liability Company Law [3][D], p 8). Thus, section 206 has no direct bearing on the court system or the adjudication of justice, but is simply one of several steps a limited liability company must take in order to enjoy the full scope of its privilege to do business."

Barklee Realty LLC v. Pataki, (S.Ct.App.Div. Oct. 16, 2003), 2003 WL 22357739

[1] David Cay Johnston, "Man Who Quit Withholding Taxes Pleads Guilty," (NYTimes, Oct. 2, 2003). "Richard M. Simkanin, who stopped withholding taxes from paychecks in 1999 at Bedford,Tex, company Arrow Custom Plastics, pleads guilty to felony tax charge; admits that he knew he had to pay taxes but hoped to get away without paying; Justice Department drops 26 other charges in return for guilty plea to one felony count; Simkanin must pay $250,000 fine, will be sentenced to no more than three years in prison and remains liable for unpaid taxes."