Venture Capital Deal Terms for Georgia in 2005
Director of Strategic Development
Morris, Manning & Martin, LLP
Despite the fact that venture capital investment in Georgia was relatively flat last year, entrepreneurs in the state are beginning to see a return to a favorable business environment and balanced deal terms offered by investors.
In a recent survey, the law firm Morris, Manning & Martin, LLP and Georgia Tech’s Advanced Technology Development Center analyzed deal terms accepted by start-ups in Georgia during 2005. These companies represented both early-stage businesses raising their first rounds of money as well as later stage companies raising additional expansion capital. Both institutional venture capital and non-institutional angel investments were represented.
The MMM/ATDC survey results reflected that 70% of surveyed companies reported the valuation offered in the investment terms was above that offered in their previous round of funding. Only 20 percent reported a flat or down round of investment. These results may reflect that Georgia’s emerging companies are meeting performance expectations and that investors are more bullish about company prospects.
Other highlights of the MMM/ATDC survey were:
The majority of new investments included liquidation preferences for preferred stock, meaning that class of stock is entitled to receive payout prior to lower classes of stock at the time of a liquidity event. However, the caps on this preference have returned to a balanced level with a 1X return being the norm. After reaching the cap, preferred stock will typically participate with common on a pro rata basis.
Investors still seek to protect their investment through the inclusion of anti-dilution provisions, but favor a weighted-average formula which is more favorable to the start-up than the full-ratchet method. Only a small number of deals surveyed included full-ratchet anti-dilution.
For the full results of the survey, please see the 2005 Georgia Deal Terms Survey published at www.mmmlaw.com. In addition to covering other terms found in venture financing deals, the report covers the general investment environment for Georgia as compared to the Southeast and the rest of the nation.
This article is presented for educational and information purposes and is not intended to constitute legal advice.