Venture Capital in Germany VC Deal Term Report 2015
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Venture Capital in GermanyVC Deal Term Report 2015
Contents
Introduction 3
General Information 4
Founder Vesting 6
Preferential Rights 10
Other Provisions 14
Conclusions Drawn from our Survey 16
About Pinsent Masons 16
Your Feedback 17
3
VC Deal Term Report 2015 | Introduction
Introduction
Pinsent Masons Germany regularly advises technology start-ups and investors on venture capital transactions. In order to provide our clients with the best advice possible and well-grounded answers to questions frequently asked regarding market standards for specific aspects of contract negotiations, we have conducted a survey.
Data for this survey was collected in 2013 and 2014. We sent 430 anonymised questionnaires to companies that had carried out venture capital financing during this period. We received 71 responses, an encouraging response rate of 17%. Of these answers, 46% related to seed capital, 39% to Series A financing, and 15% to post-Series A financing. The volume of financing per round ranged between EUR 600,000 and EUR 14 million.
This Report compares the results of this survey with the results from the VC Deal Term Reports for 2010 and 2011, which at the time were conducted by Rainer Kreifels, now Head of German Corporate and M&A at Pinsent Masons. We would like to sincerely thank all participants for filling out the survey.
In view of the valuable information we gathered – valuable not only to us but also to the entire community – we intend to start publishing an annual, updated VC Deal Term Report. Data collection for the next report will commence shortly.
We would greatly appreciate hearing your reaction to this report. For this purpose, you may use our Feedback Form on page 17. Do the results of this study also correspond to your experience with venture capital transactions in Germany? Are there any additional aspects in this area that we should pursue next time?
Let us know.
I hope you find this study interesting and informative reading.
Tobias Rodehau, LL.M. Head of German Venture Capital & Private Equity T: +49 89 203043 548 M: +49 174 233 8530 E: [email protected]
4
General Information
1. Legal form of receiving entity
2. Type of financing
The companies that participated in the survey can be cate-gorized by legal form as follows: 6% stock corporations, 86% limited liability companies (GmbH) and 4% limited partnerships (Kommanditgesellschaft). Another 4% of the companies were non-German legal forms registered in Germany. Accordingly, the GmbH is still by far the dominant legal structure for financing young German technology companies.
The large majority of financing comprises equity investments. In 85% of venture capital financing surveyed, the target company received solely or almost exclusively equity. 15% of the financing was described by the companies themselves as mezzanine financing. Of all of the investments surveyed, only 25% had elements of debt financing, and of that, rather minor volumes compared with the share of equity financing. Because this survey offered several options as a response to this question, the sum is more than 100%.
Equity financing was usually done in the form of a cash capital increase plus an additional contribution to capital reserves, a structure found in 62% of equity financing. 20% of equity financing consisted of a cash capital increase plus a true agio. No information regarding structure was provided for the remaining financing cases.
100%
80%
60%
40%
20%
0% stock corp. limited limited other forms liability co. partnerships
2014
2011
2010
Legal form
86%91% 88%
6% 5% 7% 4% 3% 1% 4% 1% 4%
Type of financing
Equity
Mezzanine
Debt
85%
25%
15%
Equity
100%
80%
60%
40%
20%
0% contribution to capital reserves true agio
2014
2011
2010
62%
85%
64%
20%
8%17%
5
VC Deal Term Report 2015 | General Information
3. Financers
4. Amount of financing
5. Milestones
The results of our survey show that, in addition to the usual early phase funding, business angels are gaining again in im-portance in funding young technology companies. The small proportion of corporate VC is probably no longer correct, because we are currently seeing a growing amount of corpo-rate venture capital activity.
The amount of fresh money raised in financing rounds ranged between EUR 1 million to EUR 10 million for 52% of the companies, under EUR 1 million for 45%, and over EUR 10 million for 3%.
In recent years, milestones have continued to be a common instrument of VC financing. 82% of transactions included milestone clauses. In the majority of cases (78%), more than one milestone was agreed upon.
100%
80%
60%
40%
20%
0% < 1 mill. 1 mill. > < 10 mill. > 10 mill.
Amount of financing
45%52%
3%
100%
80%
60%
40%
20%
0% included > 1 milestone
2014
2011
2010
Milestones
78%
52%
64%
82%73%
69%
100%
80%
60%
40%
20%
0%
Financers
founders business public German foreign corporate angels financers VC VC VC
25%
51% 52%45%
20%
1%
EUR
6
Founder Vesting
1. Founder vesting clauses included
Founder vesting clauses stipulate that the founders of the target company must relinquish all or part of their stock in the company if they stop working for the company.
73% of all financing contained founder vesting terms. As in previous years, this survey once again confirmed the fact that founder vesting clauses are absolutely commonplace in early financing rounds. In addition, it is hardly surprising that the occurrence of such clauses continues to diminish in subsequent rounds. An important fact is that, even during later phases, in two-thirds of the cases founders had to accept that founder
Founder vesting clauses
included
not included
73%
27%
Founder vesting clauses after financing rounds
100%
80%
60%
40%
20%
0%
2014
2011
2010
seed series A post-series A
79%
65%73%
64%
33%38%
68%
56%
67%
vesting was unavoidable, or, from the investors‘ point of view, they were able to include such a clause. Accordingly, founders basically must accept vesting clauses in several financing rounds that are valid for several years. With this in mind it seems advisable to concentrate on specific founder vesting clauses during contract negotiations in order to achieve fair terms.
7
VC Deal Term Report 2015 | Founder Vesting
2. Founder vesting periods
3. Exemption
Founder vesting periods were four years in 23% of the cases, three years in 48%, and two years in 22%. 7% of respondents indicated another period or gave no answer. Vesting of three years or more was therefore the most common during the period surveyed. However, we were surprised by the large share
The exemption describes that part of a founder‘s share-holding that is exempt from vesting. 78% of all founder vesting clauses stipulated no exemption, whereas 22% of them allowed for an exemption. The most commonly indicated exemption – one half of all cases – was 50% of the shares held by the founder.
of 4-year vesting clauses. It will be interesting to see if the results of future surveys show this to be a trend, or whether this was simply a one-off effect. The following shows these results categorized by financing phase.
Period
2 years
3 years
4 years
different period or no answer
48%
23%
22%
7%
Vesting period for seed financing
100%
80%
60%
40%
20%
0%
2014
2011
2010
2 years 3 years 4 years
19%
0%
28%23%
50%40%38%
13% 17%
100%
80%
60%
40%
20%
0%
2014
2011
2010
Vesting period for series A financing
2 years 3 years 4 years
16%
30%
14%
56%
37%
63%
19%27%26%
100%
80%
60%
40%
20%
0%
Vesting period for post-series A financing
2014
2011
2010
2 years 3 years 4 years
43%50%
14%11% 12%
43%
22%
38%
67%
Exemption clause
no exemption
exemption
78%
22%
8
4. Good Leaver/Bad Leaver clauses
Good Leaver/Bad Leaver clauses distinguish the reasons for a founder‘s departure from the company. Put very simply, a Good Leaver leaves the company on good terms, and a Bad Leaver leaves the company in dispute or has done something wrong. The differentiation between the various Leaver types (in individual cases there may also be other categories) is very significant and should not be underestimated. The risks embodied in founder vesting clauses are predominantly caused by its legal consequences. In addition to the question „What is the maximum amount of my shares that I will have to give up?“, there are in particular questions regarding the circumstances under which this occurs, who decides or par-ticipates in the decision, and what compensation will be offered for the relinquished shares. Without well-thought out Good Leaver/Bad Leaver provisions, it is seldom possible to achieve terms that are fair to all parties. Ultimately, these provisions serve the interests of both the target company as well as those of the investors and the other founders.
93% of all founder vesting clauses contained a Good Leaver/ Bad Leaver provision; 7% contained no such distinction. The three-year comparison also confirms that the majority of founder vesting clauses distinguish between Good Leavers and Bad Leavers.
100%
80%
60%
40%
20%
0%
2014
2011
2010
Good Leaver/Bad Leaver clauses
included not included
93%
56%50%
7%
44%50%
4.1 Consequences of Bad Leaver provisions
68% of all Bad Leaver clauses stipulated as a consequence of a Bad Leaver event a lower selling price, and 24%, a higher number of shares to be surrendered (in both cases relative to a Good Leaver event). The remaining 8% of those surveyed indicated that they had agreed on other consequences.
100%
80%
60%
40%
20%
0%
2014
2011
2010
Consequences of Bad Leaver provisions
lower selling price more shares
68%
95%
80%
24%
5%
37%
9
5. Correlation between employment agreement terms and vesting periods?
In 13% of the cases, the vesting period corresponded to the term of the initial employment agreements; however, in 87% of the cases, the vesting period was shorter. Such provi-sions are simpler when the term of the employment agree-ment corresponds to the vesting period. In practice, however, this is seldom the case, as demonstrated by this survey.
4.2 Selling price under Good Leaver provisions
The selling price in 4% of Good Leaver provisions was equivalent to the nominal value of the shares, and in 84% to the fair market value. The four-year comparison indicates a relatively strong shift toward paying the fair market value for the stock.
100%
80%
60%
40%
20%
0%
2014
2011
2010
Selling price
nominal value fair market value other value
4%
20%27%
84%80%
73%
12%
100%
80%
60%
40%
20%
0%
2014
2011
2010
Term of employment agreement
corresponds to does not correspond vesting period to the vesting period
13%19%
28%
87%81%
72%
6. Conclusions regarding founder vesting clauses
Founder vesting clauses are still very wide-spread in VC financing and contain on average vesting periods of three years.
Provisions stipulating a 50% exemption can probably be seen as common, regardless of the type of financing round. This exemption is usually earned after one year at the latest.
Good Leaver / Bad Leaver clauses are very common in vesting agreements. The most common legal consequence for a founder departing from the company as a Bad Leaver is that more of the individual‘s stock must be sold and/or at a lower price. A Good Leaver‘s stock is usually purchased at fair market value.
In more than three-fourths of the cases, the term of initial employment contracts does not correspond to the vesting period. Founders therefore run the risk of being pushed out of the company before a substantial percentage of their stock has gained any value at all. In our experience, the lack of correlation between vesting periods and the term of em-ployment is often unintended.
The information provided in the foregoing confirms the trend of past years. In the next few years we will concentrate more in our survey on the consequences of vesting provisions in order to provide a more complex evaluation of this aspect.
VC Deal Term Report 2015 | Founder Vesting
10
100%
80%
60%
40%
20%
0%
2014
2011
2010
Preferential voting rights
contained
76%84%
78%
Preferential Rights
1. Preferential voting rights
When investing in a portfolio company, investors as a rule negotiate certain preferential rights. The following will discuss the preferential rights primarily agreed.
Preferred voting rights ensure the investor certain preferential rights when voting on shareholder resolutions, e. g. in the form of special powers of decision or consent (veto powers), multiple voting rights or special majority requirements that in practice correspond to a veto right.
In 76% of all cases specific preferential voting rights were agreed that favoured the investor(s).
2. Liquidation preferences
A liquidation preference is a provision by which the investor is given preference when the exit proceeds are allocated, that is, the investor receives its investment back prior to distribution of the remaining exit proceeds.
A single liquidation preference is a provision stipulating that the investor receives 1x its investment in advance, prior to distribution of the remaining exit proceeds. A multiple liqui-dation preference stipulates that the investor receives a multiple of its investment in advance, when exit proceeds are distributed.
88% of financing agreements contain liquidation preference provisions. Of these, 78% contained a simple preference and 22% a multiple liquidation preference. In none of the cases did the multiple liquidation preference exceed two times the invested amount.
Compared with earlier surveys, the liquidation preferences have shifted in favor of founders and to the disadvantage of investors; apparently a result of the somewhat improved bargaining position of founders in some transactions. Multiple liquidity preference provisions are becoming less frequent.
11
VC Deal Term Report 2015 | Preferential Rights
100%
80%
60%
40%
20%
0% not included included single multiple
Total liquidation preferences
88%
12%
78%
22%
100%
80%
60%
40%
20%
0%
2014
2011
2010
Liquidation preferences for seed financing
single multiple
79%
90%
73%
21%10%
27%
100%
80%
60%
40%
20%
0%
2014
2011
2010
Liquidation preferences for series A financing
single multiple
69% 74%83%
31%26%
17%
100%
80%
60%
40%
20%
0%
2014
2011
2010
Liquidation preferences for post-series A financing
single multiple
90%
78%
62%
10%
22%
38%
12
3. Preferred dividend
A preferred dividend is a provision stipulating that the inves-tor receives, in addition to its liquidation preference (and less frequently: instead of), guaranteed interest on its investment prior to distribution of the remaining exit proceeds.
17% of all financing agreements contained provisions regard-ing preferred dividends. 83% contained no such provisions.
4. Anti-dilution protectionAnti-dilution protection provisions protect the investor against lower valuations of the company in subsequent financing rounds. The term anti-dilution protection is misleading, be-cause it actually involves protection (and accordingly, an adjustment) against an exaggerated valuation and not pro-tection against dilution.
100%
80%
60%
40%
20%
0%
2014
2011
2010
Amount of preferred dividend
highest lowest most common
20% 20%
10%5% 5%5% 3% 4%
18%
100%
80%
60%
40%
20%
0%
2014
2011
2010
Preferred dividend
total
17%
34%44%
On average, the preferred dividend was 10% p. a., whereby the highest preferred dividend was 20% p. a.
Compared with data from previous years, such provisions have become less frequent, whereas the amount has re-mained constant.
13
Full-ratchet anti-dilution protection provides for adjustment of the purchase price of the investor‘s stock to the company‘s lower valuation in subsequent financing rounds, regardless of how many shares are issued in the subsequent financing round at the lower valuation.
Weighted-average anti-dilution protection, on the other hand, takes into account how many shares were issued in the subsequent financing round at the lower valuation.
100%
80%
60%
40%
20%
0%
2014
2011
2010
Anti-dilution protection for series A financing
full ratchet weighted average
40% 38%32%
60% 62%68%
100%
80%
60%
40%
20%
0%
2014
2011
2010
Anti-dilution protection for post-series A financing
full ratchet weighted average
0%
12% 13%
100%
88% 87%
Anti-dilution protection
100%
80%
60%
40%
20%
0% total thereof thereof full ratchet weighted average
61%
39%
25%
100%
80%
60%
40%
20%
0%
2014
2011
2010
Anti-dilution protection for seed financing
full ratchet weighted average
43%53%
41%
57%
47%
59%
5. Conclusions drawn regarding preferential rights
To protect their respective investments, investors usually negotiate preferential rights to their advantage. As a rule, this also includes a seat on the supervisory board or advisory board. Market conditions have remained the same in this respect compared to previous years.
Nearly 75% of financing agreements contained no anti-dilu-tion protection. Those agreements containing such a provision are broken down into 61% with weighted-average anti-dilution protection and 39% with full-ratchet anti-dilution protec-tion.
VC Deal Term Report 2015 | Preferential Rights
14
Other Provisions
1. Representations and warranties
In 83% of all VC financings shareholders had to provide rep-resentations and warranties regarding the existence of their shares and that the shares are unencumbered. 88% of all VC financings included representations and warranties provided by the founders regarding the company. In 17% of all VC financings representations and warranties regarding the company were provided not only by the founders, but by all current shareholders.
It is surprising that a substantial portion (18%) of VC financings contained no guarantees at all. Also surprising (though to a lesser degree) is the fact that in one-sixth of all cases, non-founders, that is, also existing investors, provided represen-tations and warranties regarding the company (and not only regarding their shares).
100%
80%
60%
40%
20%
0% total shareholders founders other regarding regarding shareholders existence of company regarding unencumbered shares company
2014
2011
2010
Representations and warranties
83%
100% 100%
82%
100% 100%
88%
100%95%
17%22%
35%
Overall, the guarantors were liable as joint and several debtors in the majority of cases (83%).
1.2 Liability provisions
1.1 Liability of the guarantors
Whenever restitution in kind failed, payment for damages was the consequence for breach of guarantee in 56% of the cases. The legal consequences in 11% of all terms regarding breach of guarantee included a limitation amount or thresh-old. 84% of all provisions on legal consequences contained a cap on liability for specific cases of breach of guarantee.
1.3 Statute of limitations for breach of guarantee
This period is usually 12 to 24 months, similar to the last survey.
15
VC Deal Term Report 2015 | Other Provisions
2. Supervisory board/advisory board
This survey also included, for the second time now, questions regarding a seat for investors in the supervisory board/advisory board. In 44% of the cases, this type of organ already existed or was created during the respective financing round.
In 84% of such cases the investors were entitled to nominate a representative or to designate a candidate for election to this board. On average, the supervisory board/advisory board had four members, of which two seats on average were al-lotted to investors‘ candidates.
100%
80%
60%
40%
20%
0%
2014
2011
Supervisory board/advisory board
board exists seat reserved for investors
44%
93%84%
100%
3. Pay to play
A “pay-to-play” agreement obligates the investor in all sub-sequent financing rounds to acquire at least its pro-rata share in new company shares if it does not want to lose all or at least some of its preferential rights.
11% of the financing contains this type of provision. 75% of all pay-to-play agreements resulted in the loss of all prefer-ential rights.
4. Post-contractual non-compete clause
Post-contractual non-compete clauses obligate the founders leaving the company to refrain from engaging in competing activities for a specific period of time.
53% of all financing contained post-contractual non-com-pete clauses.
In a large majority of cases a term of two years was agreed for such non-compete clauses.
Whereas in previous years the compensation in a majority of cases was predominantly 50% of the most recent remunera-tion, currently one whole salary payment is paid in 60% of the cases.
16
About Pinsent Masons
Pinsent Masons is an international full service law firm whose origins trace back to 1769. Today, the firm has a legal team of around 1,700 lawyers operating out of offices across Europe, the Middle East, Asia Pacific and Australia.
Our services are clearly defined, and the combination of sector experience and legal expertise ensures our clients receive the best commercial and legal advice for their needs. Pinsent Masons Germany provides legal services across the following practice groups:
• Corporate and M&A
• IT/IP & Outsourcing
• HR & Employment
• Litigation & Compliance
• Competition
• Real Estate & Property
• Banking & Finance
• Infrastructure & Energy Projects
• Tax
In the past three years we have provided valuable advice in finalising over 30 VC financing transactions and exits in Germany alone. The volume of the venture capital transactions we advised in 2013 and 2014 (including exits for VC-financed companies) was a total of more than EUR 200 million.
We advice national and international investors and family-owned business, founder teams and target companies. Together with the teams from other Pinsent Masons offices we also advise on cross-border transactions.
Expertise in venture capital
Conclusions Drawn from our Survey
The GmbH remains by far the most commonly selected legal form for companies receiving venture capital financing. In addition, a large majority of cases involves purely equity financ-ing, rather unsurprisingly. Here, no radical changes are ex-pected for the future.
However, it is evident that increasingly individual agree-ments are drafted slightly in favour of the founders. Examples of this trend can be found especially in the areas of liquidity preference (decline in multiple liquidity preferences), anti- dilution protection (decline in full-ratchet provisions) and representations and warranties.
However, time will show whether this is only a temporary trend or whether there is a real tendency in the direction of improving contractual provisions in favour of the founders, which would be a desirable turn of events. New technology companies can achieve sustainable success only under fair conditions – which is after all also in the interest of the inves-tors involved.
Clauses that are increasingly common in Silicon Valley – stipulating that founders‘ shares vest not only after a certain time, rather also dependent upon certain qualitative goals being reached – are not yet relevant in Germany, according to our survey. It will be interesting to observe how contracts develop in this aspect in the time to come.
Based on the findings of this report we will expand and change the emphasis of our survey for the VC Deal Term Report 2016. In particular, we will pursue the topics of vesting and guaran-tees as well as the number and distribution of supervisory board and advisory board seats – both are major topics for current practice, especially in subsequent financing rounds.
Data collection for the next report will begin in autumn of 2015.
VC Deal Term Report 2015 | Conclusions Drawn from our Survey | About Pinsent Masons
1717
Plea
se te
ar o
ff he
re
1. Does this Report contain information that interests you?
Comments:
2. Does this Report reflect the terms agreed in your financing round?
Comments:
3. Will you negotiate such terms differently in the future, based on the information provided by this Report?
Comments:
4. Which issue(s) should we include next time?
1 2 3 4 5 6 (1 = yes, very interesting; 6 = no, not at all)
1 2 3 4 5 6 (1 = yes; 6 = no, not at all)
yes no maybe
We would like to have your opinion on this Report. Please fill out this form and fax it to +49 89 203043 501 or e-mail to [email protected].
Your Feedback
I consent to my data being used by Pinsent Masons LLP to contact me by mail by email regarding relevant legal developments and Pinsent Masons LLP services (e.g. additional reports, whitepapers, newsletters). I may withdraw my consent at anytime (also partially), effective in the future, for example by email to [email protected].
Your information (not mandatory)
Last name, first name Position Company
Address (street and house number, postal code, city)
Telephone Email
Thank you very much for your response.
Editors
Publisher Pinsent Masons Germany LLP Ottostrasse 21 80333 Munich Germany T: +49 89 203043 500 F: +49 89 203043 501 www.pinsentmasons.de
Concept, design and composition EGGERT GROUP, Düsseldorf
Print Woeste Druck + Verlag GmbH & Co KG, Essen
Legal notice:
Publisher:Pinsent Masons Germany LLP, Ottostraße 21, 80333 München
T: +49 89 203043 500 F: +49 89 203043 501Bank: Barclays Bank PLC, Frankfurt IBAN DE59503104000737438501 SWIFT BARCDEFF Amtsgericht München PR 1154
Pinsent Masons Germany LLP is a limited liability partnership incorporated in England and Wales (registered number: OC373389) with its registered office in London: 30 Crown Place, Earl Street, London EC2A 4ES, United Kingdom. The partnership has a German branch with a place of business in Munich at the address provided above, registered in the register of partnerships of the Munich District Court (registered number: PR 1154). The word “partner”, used in relation to Pinsent Masons Germany LLP, refers to a member of Pinsent Masons
Germany LLP, who is a lawyer, or an employee or consultant of Pinsent Masons Germany LLP or any affiliated firm with equivalent standing. A list of the members of Pinsent Masons Germany LLP, and of those non-members who are designated as partners, is available at the above noted place of business in Munich and at the above noted registered office in London.
“Pinsent Masons” is used to refer to Pinsent Masons LLP and affiliated entities, including Pinsent Masons Germany LLP, that practise under the name “Pinsent Masons” or a name that incorporates those words. Reference to “Pinsent Masons” is to Pinsent Masons LLP and/or one or more of those affiliated entities as the context requires.
© Pinsent Masons Germany LLP 2015
For a full list of our locations around the globe please visit our website: www.pinsentmasons.de
www.Out-Law.comwww.pinsentmasons.comwww.pinsentmasons.de
Related Documents
![VENTURE CAPITAL FOR SUSTAINABILITY 2007 REPORT [2007] Venture Capital... · growing sector as Venture Capital for Sustainability ... Venture Capitalists’ stake in ... Venture Capital](https://static.cupdf.com/doc/110x72/5a7926b77f8b9a00168dc540/venture-capital-for-sustainability-2007-2007-venture-capitalgrowing-sector.jpg)
