Wilson Sonsini published its Q1 2019 edition of The Entrepreneurs Report, and to sum it up, valuations remained strong. Wilson Sonsini’s report indicates that the venture financings did display some cooling off, in terms of pre-money valuations across all rounds and amounts raised in Series C and later rounds. The key highlights of the report are as follows:
Up rounds represented 83% of Series B and later financings in Q1 2019, a decrease from the 90% share in Q4 2018, Down rounds were somewhat more prevalent in Q1 2019, increasing to 9% of Series B and later financings from 6% in Q4 2018. The percentage of flat rounds also increased in Q1 2018 to 9%of financings, as compared to 4% in Q4 2018.
Senior liquidation preferences in Series B and later rounds were less common in Q1 2019, decreasing from 31% of all such rounds in 2018 to 22% in Q1 2019, the lowest percentage seen in the past five years. Pari passu liquidation preferences increased to 75% of Series B and later rounds in Q1 2019, up from 69% in 2018 and the highest percentage seen in the past five years.
The percentage of financings having a liquidation preference with participation increased slightly in Q1 2019 to 18%, up from 12% of financings in 2018. Fewer financings provided dividends in Q1 2019 than in prior years, with 60% offering dividends, as compared to 68% of financings in 2018. The use of redemption rights increased from 9% in 2018 to 21% in Q1 2019—the highest of the last five years.
The median amount raised for bridge loans grew for both pre- and post-Seed deals in Q1 2019. The median amount raised for pre-Seed bridge loans increased to $1.30 million which is the second highest quarterly median in the last five year. The median amount raised for Post-Seed bridges also raised more money, with the median amount raised climbing to $2.0 million, higher than the Q4 2018 and full-year 2018 medians of $1.50 million and $1.05 million, respectively.
Pre-Seed bridge loan interest rates rose in Q1 2019, with 38% of loans having interest rates of 8% or greater showing a moderate increase from 33% of such loans in 2018. Post-Seed bridge loan interest rates declined in Q1 2019, with just 17% of such loans having an interest rate of 8% or greater, as compared to 35% of such loans in 2018.
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.
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Wilson Sonsini’s report (The Entrepreneurs Report – Q1 2019) can be found here: https://www.wsgr.com/en/insights/the-entrepreneurs-report-private-company-financing-trends-q1-2019.html