Fenwick published its interim report on venture capital environment in light of the COVID-19 pandemic. Fenwick’s Q1 2020 survey indicates that there was a reduction in the number of financings and a decline in financing price increases, as Q1 2020 progressed. The survey analyzed the terms of 230 venture financings closed in Q1 2020 in Silicon Valley and found the following:
There was a small decline in the number of up-rounds over the course of the Q1 2020, from 81% in January 2020 and February 2020 to 73% in March 2020. By comparison, March 2019 had 76% up-rounds.
In January 2020, there were 126 venture financings in Silicon Valley—the largest number of venture financings in a single month in at least five years before declining to 60 in February 2020 and to 44 in March 2020. By comparison, there were 61 venture financings in March 2019. The increase in January may have been due to increased concern about the economy, partly due to the growing effect of COVID-19 in China, and a resulting desire to complete financings as soon as possible.
According to The Fenwick & West Venture Capital Barometer, the average price increase in January 2020 was 117%, it declined to 76% in February 2020 and declined further to 46% in March 2020. By comparison, the average price increase in March 2019 was 63%.
There were no significant change in non-price terms in the Q1 2020. During past significant economic downturns there have been an increase in terms like senior/multiple liquidation preference, ratchet anti-dilution, and pay-to-play provisions. These terms will bear watching in the coming months.
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!
Fenwick’s survey (Silicon Valley Venture Capital Flash Report - First Quarter 2020) can be found here: https://www.fenwick.com/insights/publications/silicon-valley-venture-capital-flash-report-first-quarter-2020