“…And the Terms, They Are A-Changin’…”
Well, I suppose it’s no surprise, but we’re back to the dot-com bust era when money was tight and terms were harsh. In addition to the anecdotal evidence we’ve gleaned from our own network, I’ve been reading the venture blogs in order to get a good picture of the current environment. Not a pretty picture! The overwhelming majority decree that angels (and angel funds) are “closed for business” and VC funds will stop making new investments in order to keep existing companies solvent. Many VCs anticipate having to make difficult choices in 2009…like who to save and who to (well, you know the word; I don’t want to get too maudlin…)
For anyone seeking outside capital at this time, be prepared to be offered lousy terms. Not only from a valuation perspective, but from a “total package” perspective. Even in good times there are many items added to term sheets that are not fully understood by entrepreneurs. (Remember my post saying that good lawyers are worth every penny?) Along with valuation, you can bet that most of the key terms that affect valuation will be more “investor friendly” than “company friendly” in the coming months. Not only will you see lower overall valuations to begin with, you’ll also see more Participating Preferred Stock, Liquidation Preferences greater than 1x, and Full Ratchet Anti-Dilution Protection. Some may ask if it’s worth taking such ‘expensive’ money vs. bootstrapping. As a founder the best thing you can do is educate yourself on what these terms mean (remember my earlier comment about having a good lawyer?) and go in with your eyes open.
Lynn-Ann Gries is the Chief Investment Officer of JumpStart. She previously worked in the investment banking departments at both McDonald Investments and Smith Barney (now part of Citigroup), and in the sales and trading area at Morgan Stanley. She received her MBA from New York University’s Stern School of Business and her BA in Economics from Smith College. She currently serves on the board of the Fund for the Future of Shaker Heights, the Great Lakes Science Center and Summer on the Cuyahoga (SOTC).