Wilson Sonsini published its Q4 2018 edition of The Entrepreneurs Report, and to sum it up, valuations are very strong. Wilson Sonsini’s report indicates that the venture financings market in 2018 resulted in the highest yearly median pre-money valuations and amounts raised for equity rounds. The key highlights of the report are as follows:
Up rounds represented 90% of all Series B and later financings in Q4 2018, a high not seen since Q2 2015. Up rounds represented 84% of all financings in full-year 2018, nearly matching the 85% share of up rounds seen in full-year 2017. Down rounds decreased slightly to 6% of all deals from 7% in Q3 2018, while flat rounds saw a similar decrease, from 5% to 4%.
The use of senior liquidation preferences decreased modestly in Series B and later rounds, from 35% of all such rounds in 2017 to 31% in 2018. Senior liquidation preferences in up rounds dipped from 31% in 2017 to 28% in 2018, while their use in down rounds dropped significantly, from 63% in 2017 to 36% in 2018. Pari-passu liquidation preferences in up rounds increased from 66% in 2017 to 72% in 2018, and also increased in down rounds, from 38% in 2017 to 64% in 2018.
The percentage of financings having a liquidation preference with participation fell slightly across all financings, falling from 16% in 2017 to 12% in 2018. The proportion of down rounds with participating liquidation preferences dropped dramatically from 50% in 2017 to 21% in 2018.
Only 68% of financings had dividends in full year 2018, notably lower than the 85%. The use of broad-based weighted average anti-dilution protection remained steady at 94% of all deals in 2018. The use of redemption rights decreased from 19% in 2017 to 9% in 2018.
The median amount raised in pre-Seed bridge loans increased in Q4 2018, from $1.20 million in Q3 2018 to $1.50 million in Q4 2018. The full-year median amount raised was $0.59 million, nearly twice the $0.30 million median of 2017. The median amount raised for Q4 2018 post-Seed bridge loans rebounded from $0.86 million in Q3 2018 to $1.50 million in Q4 2018. However, at $1.05 million, the full-year 2018 median amount raised for post-Seed bridge loans marked the lowest median of the past five years.
Bridge loan interest rates for pre-Seed deals increased in 2018. Among pre-Seed bridge loans, 33% had interest rates at 8% or greater, compared to 25% in 2017, while the number of pre-Seed bridge loans with interest rates less than 8% decreased to 67% in 2018, the lowest share in five years. In contrast, interest rates decreased for post-Seed bridge loans in 2018, with 65% of post-Seed bridge loans having an interest rate below 8%, compared to 56% in 2017.
The percentage of loans with maturity periods of less than 12 months decreased for post-Seed financings, from 41% in 2017 to 21% in 2018, reflecting a trend toward longer term, lower-interest loans for more mature companies.
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 – Q4 2018) can be found here: https://www.wsgr.com/en/insights/the-entrepreneurs-report-private-company-financing-trends-q4-2018.html