Venture Capital Report 2020
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20_0207 WilmerHale recognizes its corporate responsibility to environmental stewardship.
Venture Capital Report
2020
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2020 Venture Capital Report – What’s Inside 1
2 US Market Review and Outlook
6 Regional Market Review and Outlook
– California
– Mid-Atlantic
– New England
– Tri-State
10 Selected WilmerHale Venture Capital Financings
12 Law Firm Rankings – Eastern US
14 Secondary Sales of Private Company Stock: Important Tax Considerations
15 Designing a New Stock Incentive Plan
16 Privacy Considerations for Startups
17 Trends in VC-Backed Company M&A Deal Terms
18 Trends in Convertible Note and SAFE Terms
19 Trends in Venture Capital Financing Terms
20 WilmerHale Launch: Position Your Startup for Success2 US Market Review and Outlook
REVIEW US Venture Capital Financings – 1998 to 2019
# of deals $ in billions
Venture capital deal flow and proceeds
in 2019 retrenched from the record levels 6,618
6,448 137.0
set in 2018, while escalating valuations in 6,129
123.7
5,677 5,600 5,542
later-stage rounds drove the overall median 5,342
pre-money valuation to a new high. 4,645
92.9 4,385
4,644
88.5 90.4
4,090
3,543
VC-backed company liquidity activity 3,381
2,859
3,110 3,100
70.7 70.8
2,806
2,618
followed a similar pattern. The number of 2,588
49.2
2,511
2,298 2,463
44.9 44.7
43.1
VC-backed IPOs and M&A transactions 35.9
31.1 34.5 33.4
37.9
23.6 25.0 24.5
declined modestly from the 2018 tallies, 17.8
21.9 20.4
but the median pre-money valuation at the
time of IPO and the median acquisition 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
price both reached record levels. Source: Dow Jones VentureSource
EQUITY FINANCING ACTIVITY
The number of reported venture capital
financings contracted by 16%, from
6,618 in 2018 to 5,542 in 2019. Once all
financings are counted, however, the
total for 2019 is likely to exceed 6,000. Median Size of US Venture Capital Financings – 1998 to 2019
Total reported venture capital financing Life Sciences Technology All Financings $ millions
10.0
proceeds decreased by 10%, from
9.0 9.0
$137.0 billion in 2018 to $123.7 billion 8.5 8.4
7.9 8.0
in 2019, but were still one-third higher 7.0
7.5 7.3 7.17.0 7.0 7.2
7.5
7.0
7.5
7.0 7.2 7.07.2
6.6 6.6 6.7 6.8
than the next-highest annual figure 6.0 6.0 6.2
6.5
6.0
6.5
6.0
6.5
6.2
6.5
6.0 5.9
6.2
5.9
of $92.9 billion, recorded in 2000. 5.0 5.0 5.0 5.0 4.9
4.7
5.2
4.8 5.0
5.4
4.5 4.5 4.5 4.5 4.3
4.14.1 4.0 4.04.2 4.0 4.04.0
3.73.8
Overall, the median size of venture capital 3.43.5
financings increased by 31%, from $5.4
million in 2018 to $7.2 million in 2019—
the second-highest annual figure since
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
1996, behind only the $9.0 million seen
in 2000. The median size of first-round Source: Dow Jones VentureSource
financings increased by 15%, from $5.2
million to $6.0 million, as did the median in 2016—has held steady since 2012, as elite club was led by Rivian Automotive,
size of second-round financings, which VC-backed companies have increasingly with a $1.3 billion financing round,
rose from $10.0 million to $11.5 million. relied on very large later-stage financing followed by Flexport and Verily Life
The size of later-stage financings remained rounds. Between 2012 and 2015, the Sciences, each with a $1.0 billion round.
constant, at $20.0 million in 2018 and 2019. number of financing rounds of at least
The median pre-money valuation for all
$50 million soared from 82 to 283.
The median financing size for life venture financings continued its recent
Following a decline to 184 rounds in
sciences companies increased by 7%, rapid rise, more than doubling from $50.0
2016, the number of financing rounds
from $8.4 million in 2018 to $9.0 million million in 2017 to $120.0 million in 2018
of at least $50 million rebounded to 285
in 2019. For technology companies, and then surging to $222.1 million in 2019,
in 2017, then jumped by 70% to 484 in
the median financing size increased primarily due to skyrocketing valuations
2018 before edging up to 490 in 2019.
by 40%, from $5.0 million to $7.0 in later-stage rounds. The median pre-
million—the highest annual figure since Similarly, the number of financing rounds money valuation in the technology sector
the $8.0 million median in 2008. of at least $100 million saw steady growth leapt from $46.3 million in 2017 to $115.2
between 2012 and 2015, rising from 19 million in 2018 and then nearly doubled
Driven largely by investments by private to 103 before dipping to 51 in 2016 and again to $226.7 million in 2019. Among
equity, crossover and hedge funds, the then recovering to 107 in 2017, increasing life sciences companies, the median
number of very large financings rounds by 78% to 190 in 2018, and climbing to pre-money valuation grew from $31.1
continued its upward trajectory in 2019, 201 in 2019. There were three billion- million in 2017 to $86.2 million in 2018
a pattern that—other than a brief drop dollar financing rounds in 2019. This and then to $148.8 million in 2019.US Market Review and Outlook 3
Seed and first-round venture capital Median Pre-Money Valuation in US Venture Capital Financings – 1998 to 2019
financings accounted for 35% of all Life Sciences Technology All Financings $ millions
venture financings in 2019 (up from 34%
227 222
in 2018) and represented 16% of all venture
capital financing proceeds (equal to 2018).
Second-round financings represented 15%
149
of all financings in 2019 (up from 14% in
2018) and raised 16% of all proceeds (up 115120
from 13% in 2018). Later-stage financings 86
accounted for 28% of all financings in 2019 51 56 59 55
45 46 50
40
(up from 27% in 2018) and represented 51% 25 21 20 30 25 28 33 30
27
33
24 25
31
19 19 18 21 21 18 17 24 19 22 23 20 18 19 20 24 24 22 20 22
13 18 15 14 18 17 16 14 18
11 11 15 10 10 16 12 12 15 15
of all proceeds (up from 50% in 2018).
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
The technology sector produced 33%
of the year’s transactions in 2019—the Source: Dow Jones VentureSource
sector’s highest percentage in over ten
years, up from its 32% market share in
2018. The business and financial services
sector’s market share decreased from 22%
in 2018 to 21% in 2019. After remaining
steady at 20% in 2017 and 2018, the
market share for life sciences companies US Venture Capital Financings by Industry – 1998 to 2019
continued its gradual rise to reach 21% in Biopharmaceuticals Medical Devices Other Life Sciences Software Communications & Networking Other Tech
2019, a trend that has held since 2014.
Life Sciences
California—which has led the country in Technology 3,489
financing activity in each year since 1996—
produced 41% of all venture financing
transactions in 2019 (2,255 financings) 2,235
1,968
2,119
1,922
1,827
and 51% of the year’s proceeds ($63.10 1,569
1,747 1,804
1,395 1,386
billion). New York, home to companies 1,327 1,264 1,324 1,289 1,269
1,152 1,199
1,311
1,068 1,061
1,223 1,289
1,155
1,012 1,011 985
with 755 financings raising $18.75 billion 652
856
649 664 715 756 748 763 852 820 848 881 882
566 599 560 589
in 2019, finished second in the state
rankings, followed by Massachusetts
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
(with 402 financings raising $9.41 billion),
Texas (with 236 financings raising Source: Dow Jones VentureSource
$3.56 billion) and Washington (with
The largest IPO of 2019 was the $8.10 The median amount raised prior to an IPO
197 financings raising $3.29 billion).
billion offering of Uber, followed by the increased by 14%, from $128.8 million
LIQUIDITY ACTIVITY IPOs of Lyft ($2.34 billion), Pinterest in 2018 to $146.3 million in 2019, while
($1.43 billion), SmileDirectClub ($1.35 the median pre-IPO valuation climbed
The number of VC-backed US issuer billion) and Peloton ($1.16 billion). by 18%, from $385.0 million to $455.8
IPOs declined by 4%, from 75 in 2018 million. As a result, the ratio of pre-IPO
to 72 in 2019. Despite this decrease, the In 2019, life science companies produced valuation to the median amount raised
2019 total was still the third-highest 59% of all VC-backed IPOs, down from prior to an IPO increased from 3.0:1 in
annual count since 2000, topped 60% in 2018. The VC-backed IPO market 2018 to 3.1:1 in 2019—the second-highest
only by 2018’s tally and the 102 VC- share for technology companies increased level since 2012 (a higher ratio means
backed IPOs by US issuers in 2014. from 36% in 2018 to 40% in 2019. better returns to pre-IPO investors).
Boosted by five billion-dollar IPOs, gross The median time from initial funding The ratio was between 3.2:1 and 5.8:1 for
proceeds from VC-backed US issuer to IPO increased from 5.4 years in 2018 each year from 2001 to 2012, other than
IPOs more than doubled from $10.73 to 6.3 years in 2019. Among life sciences a spike to 7.6:1 in 2009 based on a very
billion in 2018 to $25.04 billion in 2019. companies, the median increased from small sample size of VC-backed IPOs that
The 2019 total surpassed the previous 3.5 years to 4.0 years (still equal to the year. By contrast, this ratio ranged from
record high of $20.99 billion set in 2012 second-lowest median since 2002), while 6.5:1 to 10.4:1 between 1996 and 2000,
(of which $16.0 billion was attributable among technology companies the median due to very large pre-IPO valuations by
to Facebook’s IPO—nearly 15 times the declined from 11.6 years to 8.5 years. younger companies during that period.
size of that year’s next-largest IPO).4 US Market Review and Outlook
The average VC-backed IPO in 2019 Venture Capital–Backed IPOs and Median Time to IPO – 1998 to 2019
gained 33% by year-end, outperforming # of deals Median time from initial equity funding to IPO (in years)
the Dow and S&P 500 but trailing the
8.7
Nasdaq’s 35% gain for the year. At the 261
7.8
end of 2019, 57% of the year’s VC-backed 7.4
7.1 7.1
7.5
6.8 6.6 6.6
IPOs were trading above their offering 201
6.2 6.2 6.1 6.3
5.7 5.6 5.6
price, up from the 46% for 2018 but below 5.4
the 64% seen in both 2016 and 2017. 4.5
3.6
3.2 102
The number of reported acquisitions of 73
2.8 2.9
72 72 75 72
63 63
VC-backed companies declined by 7%, 43 48 43 42
51
39
50
from 759 in 2018 to 708 in 2019. Total 25 20 23
7 9
reported proceeds decreased by 5%, from 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
$129.5 billion to $123.4 billion. Once
all 2019 acquisitions are accounted for, Source: Dow Jones VentureSource and SEC filings
The above chart is based on US IPOs by VC-backed US issuers.
however, the year’s deal and proceeds totals
should approach or exceed 2018’s tallies.
The median acquisition price increased
by 11%, from $108.0 million in 2018
to a new record high of $120.0 million
in 2019. The median time from initial
funding to acquisition increased
Median Amount Raised Prior to IPO and Median Pre-IPO Valuation – 1998 to 2019
from 5.3 years in 2018 to 5.4 years Median amount raised prior to IPO Median pre-IPO valuation $ millions
in 2019, the highest annual figure
456
since the 5.5-year median in 2009. 431
383 385
364 366
The median amount raised prior to 361
314 307
acquisition dipped by 3%, from $15.1 281
295
282
251
million in 2018 to $14.6 million in 229 226 224
238 240 235
202
2019. Despite the decline, this was the 170 167
146
second-highest annual figure since the 100 106
129
83 82 91 94 86
$16.3 million median in 2012. The ratio 43 48 57 55
70
51 57 64
43 50
71
30
of median acquisition price to median 18
amount raised prior to acquisition 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
increased for the third year in a row, Source: Dow Jones VentureSource
from 7.2:1 in 2018 to 8.2:1 in 2019 (a
higher ratio means higher returns to Science by PayPal, the $3.4 billion closing—whereas IPOs generally involve
pre-acquisition investors). The 2019 acquisition of Auris Health by Johnson & a post-IPO lockup period of 180 days and
figure was the highest recorded since Johnson and the $2.6 billion acquisition market uncertainty on the timing and
the ratio of 10.0:1 in 2000, at the apex of Looker Data Sciences by Google. prices of subsequent stock sales—makes
of the dot-com delirium. The increase it easy to see why venture capitalists
Based on the valuations achieved in
in this ratio reflects the combination often prefer a company sale to an IPO.
company sales and IPOs compared to the
of higher acquisition prices and lower financing amounts required to achieve Despite company sales far outpacing
levels of pre-acquisition investments. each type of liquidity event, 2019 marked IPOs as liquidity events, the ratio of
There were 26 VC-backed company the seventh consecutive year in which M&A transactions to IPOs for VC-
acquisitions of at least $500 million in returns to venture capital investors were backed companies declined for the third
2019, down from 29 in 2018, but still higher in M&A transactions than in IPOs. consecutive year. The ratio was 18.0:1 in
higher than the 19 in 2017 and the 17 in Liquidity also arrived sooner through 2016, 14.6:1 in 2017, 10.1:1 in 2018 and 9.8:1
both 2015 and 2016. The year also saw ten M&A transactions than through IPOs, in 2019—a ratio similar to the 9.4:1 over
billion-dollar acquisitions, below the 13 with a median time of 5.4 years from initial the four-year period from 2012 to 2015.
in 2018 but above the eight in each year funding to acquisition in 2019, compared
to a median of 6.3 years from initial OUTLOOK
between 2015 and 2017. The largest deal
of 2019 was the $10.7 billion acquisition funding to IPO. This fact, combined with
Results over the coming year will
of Bay Dynamics by Broadcom, followed the tendency of M&A transactions to yield
depend on a variety of factors:
by the $4.0 billion acquisition of Honey the bulk of the purchase price in cash atUS Market Review and Outlook 5
––Financing Activity: The impact of the Acquisitions of US Venture-Backed Companies and Median Time to M&A – 1998 to 2019
COVID-19 pandemic on the venture # of deals Median time from initial equity funding to M&A (in years)
capital market is difficult to predict
742 759
730
at this stage. While ample funds for 6.5
683 675
703 708
6.0 663 645
investment are available—venture capital 5.8
5.5
632
5.4 5.3 5.3 5.3 5.4
5.2 5.2 5.2
fundraising edged up from $56.5 billion 529 533 519
5.0 5.0 5.1
489 4.6 508
in 2018 to $58.7 billion in 2019—financing 464
435 427 437
399 3.7
activity appears likely to slow down over 3.5
348
2.8 2.8
the first half of 2020. A more selective 284
2.4
2.1
investment environment may help reign
in the sharp valuation increases of the
past two years. The COVID-19 pandemic
may also accelerate the adoption of 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
digital technologies and reshape certain
Source: Dow Jones VentureSource
industries far faster than would have been
anticipated even six months ago, opening
new avenues for emerging companies
with promising market solutions and
for existing companies that have found
market opportunities in the pandemic.
Early indications suggest that financing
activity declined modestly—more so Median Amount Raised Prior to Acquisition and Median Acquisition Price – 1998 to 2019
among seed and early-stage rounds than Median amount raised prior to acquisition Median acquisition price $ millions
at later stages—from the fourth quarter of 120
2019 to the first quarter of 2020, when the 106 108
100
effects of the pandemic began to be felt.
84 83
––IPOs: Although it was intended to 70
encourage emerging growth companies 55
58 60 60
52
(EGCs) to go public, the JOBS Act— 46
40
combined with other changes in 31 30
35
32
27 25
regulatory requirements and the 15 17 19 18 20 20 19 20 20 20 20 19
15 16 15 14 14 15 15
11 10 12 12
availability of large amounts of private 7
investment capital—has made it easier 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
for “unicorns” and other EGCs to stay Source: Dow Jones VentureSource
private longer. As a result, many EGCs,
particularly in the technology industry, many companies remain flush with work and the pandemic-induced “stay at
have opted to delay their public debuts, cash, and the return to historically low home” environment should be attractive
often relying on private “IPO-sized” interest rates may encourage strategic financing candidates in the coming
rounds to meet their financing needs acquirers to supplement organic growth year, while those operating in industries
and to scale up for when they eventually with debt-financed acquisitions. After hard-hit by the COVID-19 pandemic
go public. While the aftermarket a year in which the median VC-backed will likely find financing scarce. In
performance of some prominent IPOs by company acquisition price reached a addition, companies with products that
unicorns in 2019 was decidedly mixed, record high, the economic disruption leverage blockchain technology, AI,
the average VC-backed IPO fared well caused by the COVID-19 pandemic is machine learning and voice technology
in the aftermarket. The first quarter likely to restrain valuations and deal to continue the digital transformation
of 2020 saw only 11 VC-backed IPOs, activity in the near term, although of business processes should continue to
down from 16 in the fourth quarter of companies with differentiated market attract funding in 2020. Other sectors
2019, but investor needs for cash returns positions and strong growth potential are that should draw investment interest
likely to continue to attract acquisition include security, robotics, digital health,
should encourage offering activity when
interest at premium prices. Preliminary consumer e-commerce, fintech and
market conditions are more conducive.
data suggest that overall M&A activity agtech. Life sciences companies with
––Acquisitions: Despite the concern among slowed from the fourth quarter of compelling market opportunities—
public companies over the need to 2019 to the first quarter of 2020. such as those in immuno-oncology
maintain adequate cash reserves in the and gene therapy—should also
current uncertain business environment,
––Attractive Sectors: Companies offering continue to appeal to investors. <
products to meet the demands of remote6 Regional Market Review and Outlook
CALIFORNIA California Venture Capital Financings – 1998 to 2019
C
# of deals $ in billions
alifornia companies reported 2,255
financings in 2019, a decline of 18% 2,752 80.4
2,537
from the 2,752 in 2018. Total proceeds 2,309 2,370 2,370
2,490
2,255
63.1
were $63.10 billion, down 22% from the 1,978 1,943
$80.44 billion reported in 2018, but 45% 1,711
1,857
46.7
higher than the $43.55 billion in 2017. 41.1 1,359
1,428 1,379
43.6
1,287 1,262 37.0
1,217 1,157 35.2
1,124
1,050
Despite the overall decline in deal 962 942
22.7
count and volume, the number of very 15.4 15.5 17.3 17.7 15.8
19.9 19.6 20.4
12.8
large financings continued to increase 7.5
10.2 9.0
11.1 11.9
in 2019. The number of rounds raising
$50 million or more grew by 3%, from 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
264 in 2018 to 271 in 2019, while the Source: Dow Jones VentureSource
number of rounds of $100 million or
more increased by 6%, from 113 to 120.
California was responsible for 41% of all
financing transactions in the country in
2019, compared to 42% in 2018, and 55% of
all financing rounds raising $50 million or
more in 2019, equal to the figure for 2018. California Venture Capital Financings by Selected Industry – 1998 to 2019
Biopharmaceuticals Medical Devices Other Life Sciences Software Communications & Networking Other Tech
Technology was the largest sector
Life Sciences
in the state, producing 37% of all 1,501
Technology
California financings in 2019, followed
by business and financial services and
consumer goods and services (both 1,014
943 976
at 22%), and life sciences (17%). 763 761
826 837
745
623 649 640 654
602 597 601
The number of California VC-backed 561 535
486
567 565
463
402
company IPOs rose by 9%, from 33 in 309
398
326 325 352
391
244 240 252 244 259 237 246 251 266
225
2018 to 36 in 2019, marking three straight 206 216 208 214 207
years of growth and accounting for
three-quarters of the nation’s 20 largest 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
VC-backed IPOs. The state’s largest IPOs Source: Dow Jones VentureSource
were by Uber ($8.10 billion), Lyft ($2.34
billion) and Pinterest ($1.43 billion).
The number of reported acquisitions
of California VC-backed companies
declined by 16%, from 331 in 2018 to
277 in 2019. The state’s largest deals
were PayPal’s $4.0 billion acquisition California Venture-Backed IPOs and Acquisitions – 1998 to 2019
of Honey Science, Johnson & Johnson’s # of IPOs # of acquisitions
$3.4 billion acquisition of Auris 344
331
Health and Google’s $2.6 billion 316
293
286 292
acquisition of Looker Data Sciences. 274 267
276 277
California will undoubtedly maintain 205
193 185
its venture capital leadership in the 159
168
178
166
149 155
coming year, although its level of 122
131
142
financing and liquidity activity will 85
95
depend on macroeconomic conditions, 44
34 33 30 33 36
the willingness of strategic buyers to 29
13 7 11 14 16
29
19 22 27
12 18
3 2
pay attractive prices, and the state of 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
the IPO market, among other factors.
Source: Dow Jones VentureSourceRegional Market Review and Outlook 7
MID-ATLANTIC Mid-Atlantic Venture Capital Financings – 1998 to 2019
# of deals $ in billions
With 272 rounds, the number of reported
2019 venture capital financings in the
mid-Atlantic region of Virginia, Maryland, 512 6.7
North Carolina, Delaware and the 5.9
District of Columbia represented a 20%
339
decline from the 339 financings in 2018. 312
3.9
314
274 3.8 272 3.8
256 270
3.3
Total proceeds in the mid-Atlantic region 3.2 238 3.0
202
217 204 198 2.6 200
220
187 192 185 2.4 194 2.4
declined by just over one-third, from $5.86 1.8
166 163 2.0 2.0
170
1.9 2.0 2.1
2.3
1.7
1.5 1.5 1.5
billion in 2018 to $3.81 billion in 2019,
as deal sizes in the region contracted.
Virginia led the mid-Atlantic region 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
in deal flow for the seventh time in Source: Dow Jones VentureSource
the last ten years, with 91 financings,
while North Carolina led the region in
proceeds, with a total of $1.31 billion.
The number of mid-Atlantic rounds
raising $50 million or more increased
by 25%, from 16 in 2018 to 20 in 2019.
The region’s largest financings were by Mid-Atlantic Venture Capital Financings by Selected Industry – 1998 to 2019
Asklepios BioPharmaceutical ($225
Biopharmaceuticals Medical Devices Other Life Sciences Software Communications & Networking Other Tech
million), AvidXchange ($150 million)
and CuriosityStream ($140 million). Life Sciences
Technology 257
Technology companies accounted for
34% of all mid-Atlantic financings
in 2019—extending the sector’s
longstanding leadership in the region— 153
142
129
followed by business and financial 120
102 99 106
90 88 89 91
services companies and life sciences 75 80 81 87
65 58
74
84 80 73
55 58 56 59 59 60
companies (each with 23%). 48 44
54
40
53 51 52 45 39
53
44 40 42
49 52 50
The region generated three VC-backed
IPOs in 2019, up from two in the prior 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
year. Maryland produced two of the Source: Dow Jones VentureSource
IPOs—Viela Bio ($150 million) and
NextCure ($75 million)—with the third
coming from North Carolina–based
Precision BioSciences ($126 million).
The number of reported acquisitions
of mid-Atlantic VC-backed companies
declined by 11%, from 47 in 2018 to 42 in Mid-Atlantic Venture-Backed IPOs and Acquisitions – 1998 to 2019
2019, with Virginia generating 14 deals
# of IPOs # of acquisitions
and North Carolina adding 13 deals.
The region’s largest M&A transactions 69
were the $1.2 billion acquisition of
55
Paragon Bioservices by Catalent and
47
the $510 million acquisition of Lender 42 42 41
43
45
42
39 39
Performance Group by Q2 Holdings. 36 37 38 38
36
34 35
32
30
With a strong venture capital ecosystem
and attractive financing candidates, 19
15 16
13
the mid-Atlantic region should be 7
6 6 5
poised for growth in financing activity 4
1 1 2 2
4 4
0 0
3
1
4
2
4
2 3
if market conditions are conducive. 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: Dow Jones VentureSource8 Regional Market Review and Outlook
NEW ENGLAND New England Venture Capital Financings – 1998 to 2019
# of deals $ in billions
New England companies reported 490
venture capital financings in 2019, 835 13.2
17% fewer than the 591 financings 12.1
in 2018. Total proceeds were $10.08 10.1
622 9.6
billion, a decline of 24% from the $13.20 564 551 8.9
591
493 505 503 494
billion in the prior year, but still the 436 429 448 462 7.0
490
401 396 415 6.4
third-highest annual gross proceeds 5.8 5.6 379 367 366 355
385 5.9
5.2
4.7 5.0
4.6
achieved in the region’s history. 3.6 3.6 3.5
3.9 3.8 4.0
3.4
2.4
Massachusetts, the perennial leader in
New England and the nation’s third-
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
largest source of VC financings, led
the region in 2019 with 402 financings Source: Dow Jones VentureSource
and $9.41 billion in proceeds.
The number of rounds raising $50
million or more decreased by 26%,
from 73 in 2018 to 54 in 2019. The
largest rounds were raised by Ginkgo
Bioworks ($290 million), Toast ($250
million) and DataRobot ($206 million). New England Venture Capital Financings by Selected Industry – 1998 to 2019
Biopharmaceuticals Medical Devices Other Life Sciences Software Communications & Networking Other Tech
The life sciences sector represented 42% of Life Sciences
476
New England’s venture capital financings Technology
in 2019, followed by technology (29%)
and consumer goods and services (16%). 338
278
The number of VC-backed IPOs by New 215
240
214 203 206 205
199
England–based companies declined 175 170 181 173 164
156 151 157 146
144 141
by one-third, from 21 in 2018 to 14 in 128
103 115 127 116
132
110 119 107 112
137
121 127 122 111
139 140
94 102 100 95
86
2019—all by life sciences companies. 83
Massachusetts led the region with 12
IPOs, with Connecticut accounting for 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
the remaining two. The region’s largest
Source: Dow Jones VentureSource
VC-backed IPOs were by SpringWorks
Therapeutics ($162 million) and
Stoke Therapeutics ($142 million).
The number of reported acquisitions of
VC-backed companies in New England
increased by 38%, from 55 in 2018 to 76
in 2019, with Massachusetts contributing New England Venture-Backed IPOs and Acquisitions – 1998 to 2019
63. The region’s largest M&A transaction # of IPOs # of acquisitions
was the $950 million acquisition
93 92
of Semma Therapeutics by Vertex 89
83
80
Pharmaceuticals, followed by the $470 75 75 73
76
72
69
million acquisition of Onshape by PTC. 62
67
61
54 55
51 51 51
With its concentration of world-renowned 47
40
universities and research institutions, 37
New England—and Massachusetts in 27 25 25
21
particular—should remain a hub of 18
12 14 14
8 9 9
financing and IPO activity over the 7
1 3
7 6
2 3 4
7
0 0
coming year, particularly in the life 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
sciences and technology sectors.
Source: Dow Jones VentureSourceRegional Market Review and Outlook 9
TRI-STATE Tri-State Venture Capital Financings – 1998 to 2019
# of deals $ in billions
The number of reported venture capital
financings in the tri-state region of New 1,065
1,112 21.6
York, New Jersey and Pennsylvania 954 953 959
declined by 14%, from 1,112 in 2018 to 849 16.3
17.1
774 761
959 in 2019. Total proceeds increased by 684
638
26%, from $17.05 billion to $21.55 billion. 11.0 566
12.3
11.4
502 482
465
New York, the nation’s second-largest 378
434
7.7
442 8.3
source of VC financings, led the tri- 5.4 281 275 298 277 5.7
4.8 5.2
233 4.6 4.6 4.2
state region in 2019 with 755 financings 2.4 2.6
3.3 3.0
3.8
2.1 2.2
and $18.75 billion in proceeds.
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
The number of rounds raising $50
million or more increased by 10%, from Source: Dow Jones VentureSource
69 in 2018 to 76 in 2019, while rounds
of $100 million or more increased by
30%, from 23 to 30. The region’s largest
financings came from GoBrands ($750
million) and UiPath ($568 million).
Technology and consumer goods and
services companies each accounted for Tri-State Venture Capital Financings by Selected Industry – 1998 to 2019
29% of the tri-state region’s VC financings Biopharmaceuticals Medical Devices Other Life Sciences Software Communications & Networking Other Tech
in 2019, followed by business and Life Sciences
financial services companies with 27% 335
Technology
and life sciences companies with 18%. 285 283 277
There were eleven VC-backed IPOs in the 219
229
241
tri-state region in 2019, up from seven 195
169 172
in the prior year. New York produced 159
168
137 134
seven of these IPOs, with Pennsylvania 117
107
117
107 102
125
112 106 105 102
125 129
111
124
99 100
89 93 88
contributing three and New Jersey 90
71
90
66 70
81 77 82 87 87
54
adding one. The four largest venture-
backed IPOs in the region came from
technology companies, led by Peloton 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
($1.16 billion) and Datadog ($648 million).
Source: Dow Jones VentureSource
The number of reported acquisitions of
VC-backed companies in the tri-state
region increased by 15%, from 115 in
2018 to a record-high tally of 132 in 2019.
New York generated 99 deals in 2019,
followed by Pennsylvania with 23 and New
Jersey with ten. The region’s largest M&A Tri-State Venture-Backed IPOs and Acquisitions – 1998 to 2019
transactions were Broadcom’s $10.7 billion
# of IPOs # of acquisitions
acquisition of Bay Dynamics and Taboola’s
132
$850 million acquisition of Outbrain. 121 122
128 129
116 113 115
110
With strength across a broad array of 100
industry sectors, including consumer,
technology and life sciences, the tri-
state region should continue to produce 61
55 54
attractive financing candidates in the 48
42
48 48
42
38 40 38
coming year, although further growth 30
in liquidity events will depend in part 20
15 12
10 9 10 8 9 8 11
on macroeconomic conditions. < 2 5
1
5 6
1 1 1
7 7
3
7
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: Dow Jones VentureSourceCounsel of Choice for Venture Capital Financings
Serving industry leaders in technology, life sciences, cleantech, financial services, communications and beyond
$110,000,000 $82,750,000 $112,000,000 $300,000,000 $18,000,000 $20,000,000 $38,000,000 $3,000,000
Third Round First Round Late Stage Fourth Round Late Stage Second Round Late Stage Seed Round
January 2020 March 2019 February 2020 October 2019 December 2019 May 2019 February 2019 February 2019
$82,680,000 $7,800,000 $11,000,000 $10,000,000 $65,000,000 $12,900,000 $110,000,000 $12,000,000 $65,000,000
Strategic Round Second Round Second Round Second Round Second Round Second Round Late Stage Second Round Third Round
April 2019 September 2019 December 2019 March 2020 December 2018 March 2019 May 2019 March 2019 September 2019
$50,000,000 $80,000,000 $29,400,000 $53,000,000 $6,000,000 $15,000,000 $80,000,000 $6,000,000
Late Stage Second Round Second Round First Round Second Round Third Round Second Round First Round
March 2019 March 2020 November 2019 June 2018 September 2019 March 2019 August 2018 September 2019
$12,900,000 $9,800,000 $23,000,000 $11,500,000 $145,000,000 $60,000,000 $56,000,000
Seed Round First Round Second Round First Round Late Stage Second Round First Round
December 2019 November 2019 December 2018 June 2019 March 2020 July 2019 August 201912 Law Firm Rankings – Eastern US
Counsel to Eastern US Technology and Life Sciences
Companies Receiving VC Financing – 2008 to 2019
.
The above chart is based on VC-backed companies located east of the Mississippi River that were private and independent as of the end of 2018.
Source: Dow Jones VentureSource
Counsel to Eastern US VC-Backed Technology and Life Sciences
Companies at Year-End 2019
.
The above chart is based on VC-backed companies located east of the Mississippi River that were private and independent as of the end of 2018.
Source: Dow Jones VentureSourceLaw Firm Rankings – Eastern US 13
Company Counsel in Eastern US VC-Backed IPOs – 1996 to 2019
Wilmer Cutler Pickering Hale and Dorr LLP 102
Goodwin Procter LLP 66
Cooley LLP 43
Morgan, Lewis & Bockius LLP 35
Latham & Watkins LLP 26
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. 18
DLA Piper LLP (US) 15
Ropes & Gray LLP 15
Wilson Sonsini Goodrich & Rosati, P.C. 15
Hogan Lovells US LLP 14
Locke Lord LLP 13
Foley Hoag LLP 12
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP 12
Skadden, Arps, Slate, Meagher & Flom LLP 12
Nixon Peabody LLP 8
The above chart is based on VC-backed companies located east of the Mississippi River.
Source: Dow Jones VentureSource and SEC filings
Counsel in Sales of Eastern US VC-Backed Companies – 1996 to 2019
The above chart is based on VC-backed companies located east of the Mississippi River.
Source: Dow Jones VentureSource14 Secondary Sales of Private Company Stock: Important Tax Considerations
V enture-backed companies are staying
private longer than ever. Holders of
stock in those companies—particularly
weighing in favor of non-compensatory
treatment is whether non-employee
stockholders participated in the sales on
the company should discuss the potential
impact of the sale with its valuation firm.
founders and early employees, as well as the same terms as employee stockholders, QSBS ELIGIBILITY
angel investors—often become impatient though the strength of this factor will
waiting for liquidity through a company depend on the level of participation. A portion of the gain (100% in the case
sale or IPO. As a result, resales of of stock issued after September 27, 2010)
outstanding shares of private company DIVIDEND TREATMENT from the sale of qualified small business
stock (referred to as secondary sales) have stock (QSBS) held for more than five years
grown in popularity. Secondary sales are If the company is the purchaser, the is excludible from the holder’s income,
made to current or new investors, often in purchase price (other than any premium generally up to a cap equal to the greater
connection with a company financing, or that is treated as compensation income) of $10,000,000 or ten times the holder’s
sometimes made directly to the company may be treated as dividend income if tax basis in the stock. In order to be QSBS,
(referred to as a company buyback). the company has “earnings and profits” stock must meet various requirements
for tax purposes. A company buyback under Section 1202 of the Internal Revenue
While secondary sales can provide is generally treated as a dividend rather Code, and stock purchased by an investor
stockholders with desired liquidity, than a sale of stock to the extent a in a secondary sale does not qualify as
companies and stockholders should be stockholder’s proportionate interest in the QSBS. For this reason, investors may be
mindful of several tax considerations, company is not substantially reduced as unwilling to purchase stock from existing
which are summarized below. Other a result of the repurchase. A sale of stock stockholders and may prefer company
considerations, such as corporate and generally results in capital gain equal to buybacks out of a portion of the company’s
securities laws, must also be taken into the purchase price less the holder’s tax financing proceeds. However, company
account in structuring secondary sales. basis in the stock. Although dividends buybacks may prevent stock issued during
generally are taxed at the same rate as specified periods before or after the
COMPENSATION INCOME long-term capital gain if holding period buyback from qualifying as QSBS. Before
Typically, when an investor purchases requirements are satisfied, any amount engaging in a company buyback, the
outstanding common stock from treated as a dividend would not be reduced company should confirm that the buyback
employee-stockholders in conjunction with by the holder’s tax basis in the repurchased will not adversely affect the anticipated
a preferred stock financing, the investor is stock, and dividend income would not be
QSBS treatment for stockholders.
willing to purchase the common stock for eligible for the qualified small business
the same price it is paying the company stock exclusion discussed below. OPTIONS
for the preferred stock (or at a discount—
IMPACT ON SECTION 409A VALUATION Employees may need to exercise options to
perhaps 10–15%—to that price). In some
participate in a secondary sale. Conditional
cases, the investor is unwilling to purchase Most venture-backed companies
common stock directly from employees but option exercises or cashless exercises in
periodically obtain common stock
permits the company to use a portion of the conjunction with secondary sales may
valuations from an independent third
financing proceeds to repurchase common result in the modification of an incentive
party so that employee option grants are
stock from employees at the preferred stock option (ISO). In general, following
exempt from the deferred compensation
stock price (or at a discount to that price). modification of an ISO, income and
rules under Section 409A of the Internal
employment tax withholding would apply
If the price paid to an employee for Revenue Code. For an exemption to
to the ordinary income resulting from
common stock exceeds its fair market apply, options must have an exercise
the exercise of the option. Income and
value, the premium may be taxed as price at least equal to the fair market
employment tax withholding does not
compensation income rather than capital value of the underlying stock on the date
generally apply to the exercise of an ISO or
gain, depending on factors such as who of grant. Secondary sales at a premium
disqualifying disposition of stock acquired
the purchaser is, whether non-employee to the common stock valuation may
upon exercise of an ISO. Alternatively,
stockholders participated in the sales, and affect the company’s next Section 409A
rather than repurchasing shares issued
the purpose of the sales. If the company valuation because IRS regulations
upon employee option exercises, the
is the purchaser, the premium generally require the valuation firm to consider
such sales in its valuation. Depending company could cancel the options in
will be compensation income, subject to
on the frequency and other facts of the exchange for a cash payment. While
income tax reporting and withholding,
secondary sales and the methodologies income and employment tax withholding
unless there is a strong business purpose
used by the valuation firm, the impact would apply to the cash payment,
for the purchase unrelated to employee
may not be significant (for example, if cancellation of the option in exchange for
retention and compensation. If an investor
the sales are determined to be isolated). a cash payment would avoid the adverse
(particularly a new investor) is the
Prior to participating in a secondary sale, tax consequences resulting from potential
purchaser, the premium is less likely to be
dividend treatment discussed above. <
treated as compensation. Another factorDesigning a New Stock Incentive Plan 15
D esigning a new stock inventive plan
involves numerous decisions. Two
of the most important address the types
large percentage of total capitalization and
plan size is routinely increased as needed,
subject to limitations imposed by investors.
for an exemption from the short-swing
liability provisions of Section 16 of the
Securities Exchange Act of 1934.
of awards and number of shares that
will be available under the plan. For a TRANSITION TO PUBLIC COMPANY PLAN ––Outside Director Compensation Limits:
Limits on non-employee director
variety of reasons, the typical approach
As part of its IPO preparations, a company compensation—which frequently apply
to these and other topics is different for
going public will generally adopt a to both cash and equity awards—have
startup companies and IPO companies.
new stock incentive plan. A variety of become much more prevalent in
securities, tax, corporate governance, light of lawsuits that have challenged
TYPES OF AWARDS executive compensation and accounting excessive director compensation even
Startup companies usually adopt a stock considerations must be addressed to devise when the equity grants providing
incentive plan providing for the grant of a new plan that meets the company’s such compensation were made under
equity incentives in the form of restricted needs, is suitable for a public company, stockholder-approved plans.
stock, stock options qualifying as incentive and satisfies all relevant constituencies.
Since is it much simpler for privately held
stock options (ISOs) under Section 422 of
The terms and administration companies to obtain stockholder approval,
the Internal Revenue Code, and options not
of IPO company stock incentive companies going public typically adopt a
qualifying as ISOs (NSOs). Although stock
plans typically differ from private new plan prior to the IPO and authorize
incentive plans often permit the grant of
company plans in several respects: sufficient shares to delay for several years
other types of stock-based awards, private
the need for public stockholder approval
companies tend to stick to restricted stock ––Types of Awards: Additional types of of a plan increase. By using an evergreen
and stock options because they are familiar equity awards, such as stock appreciation
provision, it is even possible to structure
to employees and easy to administer. rights (SARs), restricted stock units
a plan so that public stockholder approval
The primary differences among restricted (RSUs), performance awards and
of a plan increase is never required. <
stock, ISOs and NSOs relate to tax tandem awards, are usually allowed.
treatment. For employees, as long as the
––Evergreen Provisions: “Evergreen” SELECTED PLAN METRICS
fair market value of the common stock is
provisions are often included, under
low, the purchase of restricted stock at fair
which the number of plan shares is As benchmarks, among all US companies
market value coupled with a Section 83(b)
subject to an automatic annual increase completing IPOs between 2015 and
election is generally preferable because
for a stated number of years (typically 2019 (2018 and 2019 only, for limits
no tax is payable until the shares are sold,
ten) equal to a specified percentage of on director compensation):
all appreciation is capital gain and the
the total number of shares outstanding
“alternative minimum tax” does not apply.
at the end of the previous fiscal year.
––The number of shares reserved for issuance
After the fair market value increases to under all company stock plans represented a
the point where the purchase of restricted ––Repricing Prohibition: Both Nasdaq median of 14.9% of the company’s fully diluted
stock represents a significant investment and the NYSE prohibit the repricing of shares outstanding upon completion of the IPO.
risk, employees may prefer options over options and SARs without stockholder ––The number of shares reserved for
shares of restricted stock, and may prefer approval unless the stockholder- issuance under the new, post-IPO stock
ISOs over NSOs because the tax on the approved plan under which the awards incentive plan represented a median of
difference between the fair market value are granted explicitly permits repricings 7.6% of the company’s fully diluted shares
of the stock at the time of option exercise without stockholder approval. Most outstanding upon completion of the IPO.
and the exercise price is generally deferred public company stock plans prohibit
until the employee sells the stock, and ––An evergreen provision was present in
repricings without stockholder 64% of all post-IPO stock incentive plans,
the exercise of ISOs does not trigger approval because of the intense investor with a median size of the automatic annual
income tax withholding or additional disfavor surrounding repricings. increase equal to 4.0% (typically subject
Social Security taxes. (These advantages
to reduction in the board’s discretion).
may be reduced, however, by application ––Broker-Assisted Exercises: In a public
of the alternative minimum tax.) company, options are most frequently ––Three-fourths of all post-IPO stock incentive
exercised through a broker facility under plans included limits on non-employee
PLAN SIZE which shares subject to the option are director compensation, with the median
sold to cover the exercise price and annual limit being $750,000, and 51%
Startup companies almost universally rely of such plans provided that the annual
withholding taxes, rather than through
on equity incentives to motivate employees limit was higher for the calendar year in
cash payment by the optionholder.
and conserve cash. To provide ample which a non-employee director is first
headroom for anticipated company growth, ––Section 16: Grants to directors and appointed or elected to the board.
initial plan size often represents a fairly officers are usually structured to qualify16 Privacy Considerations for Startups
S tartups in any industry have
a lot to think about: funding,
staffing, intellectual property, market
personal information is protected from
unintended and impermissible activity.
the company typically has only modest
legal obligations. If the company partners
with health insurers or hospitals, it is
––“Cybersecurity” refers to protection of
share and product viability, among likely subject to the HIPAA privacy and
the overall technological infrastructure—
other considerations. Another security rules as a service provider to these
with a focus on national security and
important topic in an increasing entities. Where a company operates its
Internet interconnections—which may
range of situations is privacy law. business also matters in evaluating whether
or may not involve personal data.
the company is subject to state-specific
Privacy law (and its cousin, data security
PRIVACY IN THE UNITED STATES laws or laws in other countries. These
law) now impacts virtually every company
principles matter for overall compliance,
in every industry, anywhere in the world,
The United States has a large and growing product design, customer and vendor
that gathers, collects, uses or analyzes the
number of privacy laws and regulations relationships, marketing opportunities
personal data of employees, customers,
at the state and federal levels. To date, and, critically, mergers and acquisition
consumers or others. As a consequence
these laws have been specific to industry activity, given that acquirers now are
of the Internet of Things and smart
segment (such as health care and drilling down into data assets, data rights
phones, as well as the ability to collect
banking) or to business practice (such and privacy, and security compliance.
data from almost anything, more and
as telemarketing). There is no generally
more companies are using and gathering The privacy area is evolving rapidly
applicable US privacy law at the federal
data, and privacy law increasingly will and likely will continue to do so for the
level covering all industries and all data
dictate how a company can use this foreseeable future. Other states may follow
(although that may be changing), but
valuable asset. Privacy issues affect a California in passing broad-based privacy
there is increasing complexity within
broad range of critical topics for startups, laws. The federal government is likely to
the regulatory environment. The United
including business partnerships, overall pass a national privacy law in the next five
States is beginning to see state-level
business plan issues, market opportunities years. New technologies raise concerns, as
laws (such as the California Consumer
and, of course, realistic acquisition does the use of artificial intelligence and
Privacy Act) that apply across industries.
opportunities. Startups that fail to think algorithms. Startups should plan for these
A new set of “specialty” privacy laws
about these issues from the beginning may issues from the outset, as it does not take
dealing with emerging technologies
be missing opportunities and reducing much to consider them, but companies may
like facial recognition and location data
their chances for future success. face real risks and missed opportunities
is also becoming more common. In
if they don’t think about them at all. <
addition, US law requires any company
A BRIEF HISTORY
that collects personal information to
Privacy began as a constitutional law provide “reasonable and appropriate” KEY PRIVACY ISSUES TO CONSIDER
topic and did not become a significant security for that information.
issue for American businesses until Startups should consider the following
the mid-1990s. From its tentative and OUTSIDE THE UNITED STATES questions right from the start:
narrow beginnings, privacy law is now
an enormous compliance and regulatory
A growing number of countries have ––Data flows—what data are we generating?
separate privacy and security rules
issue for nearly all companies across all
related to data in or originating from ––From where are we obtaining other
industries. Privacy is relevant for company data? Do we (or our source) have the
those countries. Where these laws
data on employees, customers, consumers necessary permissions and rights?
exist, the rules usually are tougher than
or anyone else. It is front-page news on a
in the United States—meaning that ––Are we collecting or using sensitive data,
regular basis, leading to highly publicized
they are more protective of individual including health, financial, genetic, biometrics,
concerns about artificial intelligence, big
privacy. Many of these laws apply to US facial recognition or location data?
data, discrimination and a broad variety of
companies, either because those companies
privacy concerns. It is a top-of-mind issue ––Can we “aggregate” data for analytics
have a presence in these countries or
for consumer advocates, regulators and or product improvement?
because of the “extra-territorial reach”
legislators around the country and world.
of these laws (such as the General Data
––Can we legally or practically
Protection Regulation in Europe). de-identify the data?
KEY CONCEPTS
Three related concepts are GOING FORWARD ––What are we doing with our data?
key in privacy law:
Privacy law issues affect a broad range ––What rights do we have in the data?
––“Privacy” means the laws, regulations of company operations, including core
and practices surrounding how corporate strategy issues. For example,
––Are we interested in selling the data?
personal data is used, gathered, given that current US law is primarily ––What happens to relevant data at
maintained and disclosed. sectoral, determining the exact sectors the end of a client relationship?
in which a company operates is crucial.
––“Security” means the laws, regulations In the healthcare space, if a company’s ––Who are our customers and partners?
and practices surrounding how
business model is direct to consumer,Trends in VC-Backed Company M&A Deal Terms 17
W e reviewed all merger transactions between 2012 and 2019 involving venture-backed targets (as reported in either Dow Jones
VentureSource or Pitchbook for 2019 or in Dow Jones VentureSource for years prior to 2019) in which the merger documentation
was publicly available and the deal value was $25 million or more. Based on this review, we have compiled the following deal data:1
Characteristics of Deals Reviewed 2012 2013 2014 2015 2016 2017 2018 2019
Sample Size 26 27 37 27 19 18 37 20
Cash 73% 59% 59% 67% 53% 56% 84% 60%
Stock 8% 11% 6% 4% 0% 0% 3% 0%
Cash and Stock 19% 30% 35% 29% 47% 44% 13% 40%
Deals with Earnout 2012 2013 2014 2015 2016 2017 2018 2019
With Earnout 31% 33% 30% 26% 37% 22% 32% 40%
Without Earnout 69% 67% 70% 74% 63% 78% 68% 60%
Deals with Indemnification 2012 2013 2014 2015 2016 2017 2018 2019
With Indemnification
By Target’s Shareholders 100% 100% 97% 100% 100%2 94% 3 84% 80%
By Buyer 62% 44% 49% 69% 37% 61% 39% 45%
Survival of Representations and Warranties4 2012 2013 2014 2015 2016 2017 2018 2019
Shortest 10 Mos. 12 Mos. 12 Mos. 12 Mos. 12 Mos. 9 Mos. 12 Mos. 12 Mos.
Longest 24 Mos. 30 Mos. 24 Mos. 24 Mos. 18 Mos. 24 Mos. 24 Mos. 24 Mos.
Most Frequent 18 Mos. 18 Mos. 12 &18 Mos. (tie) 18 Mos.) 18 Mos. 12 Mos. 18 Mos. 18 Mos.
Caps on Indemnification Obligations 2012 2013 2014 2015 2016 2017 2018 2019
With Cap 100% 100% 100% 100% 100% 100% 100% 100%
Limited to Escrow 81% 88% 89% 79% 83% 94%6 79% 86%
Limited to Purchase Price 0% 0% 0% 0% 0% 0% 0% 0%
Exceptions to Limits5 96% 100% 100% 100% 95% 94% 100% 100%
Without Cap 0% 0% 0% 0% 0% 0% 0% 0%
Escrows 2012 2013 2014 2015 2016 2017 2018 2019
With Escrow 100% 93%7 100% 93% 89% 100% 90%7 94%
% of Deal Value
Lowest 8 5% 5% 2% 4% 5% 4% 3% 10%
Highest 16% 20% 16% 16% 15% 13% 15% 13%
Most Frequent 10% 10% 10% 10% 10% 5% 10% 12%
Length of Time9
Shortest 10 Mos. 12 Mos. 12 Mos. 12 Mos. 12 Mos. 9 Mos. 12 Mos. 12 Mos.
Longest 48 Mos. 30 Mos. 24 Mos. 36 Mos. 24 Mos. 24 Mos. 36 Mos. 36 Mos.
Most Frequent 12 Mos. 18 Mos. 12 Mos. 12 & 18 Mos. (tie) 18 Mos. 12 & 18 Mos. (tie) 18 Mos. 12 Mos.
Exclusive Remedy 73% 60% 86% 63% 88% 71% 72% 64%
Exceptions to Escrow Limit Where Escrow Was 100% 100% 100% 100% 93% 92% 100% 100%
Exclusive Remedy5
Baskets for Indemnification 2012 2013 2014 2015 2016 2017 2018 2019
Deductible 10
27% 50% 44% 31% 47% 63% 47% 56%
Threshold10 65% 42% 56% 61% 53% 37% 53% 44%
MAE Closing Condition 2012 2013 2014 2015 2016 2017 2018 2019
Condition in Favor of Buyer 95% 100% 97% 100% 100% 94% 100% 100%
Condition in Favor of Target 9% 17% 19% 12% 39% 22% 12% 35%
Exceptions to MAE 2012 2013 2014 2015 2016 2017 2018 2019
With Exception 11 84%12 96%13 100% 100% 100% 100% 97%13 100%
1 For certain transactions, certain deal terms have been redacted from the publicly available documentation and are not reflected in the data compiled below.
2 Includes one transaction where the only representations that survive for purposes of indemnification are certain “fundamental” representations and representations concerning material contracts and intellectual property.
3 Includes one transaction where the only representations that survive for purposes of indemnification are those concerning capitalization, financial statements and undisclosed liabilities, but excludes one transaction where indemnification was provided for breaches of covenants prior to the closing but representations
did not survive for purposes of indemnification.
4 Measured for representations and warranties generally; specified representations and warranties may survive longer.
5 Generally, exceptions were for fraud, willful misrepresentation and certain “fundamental” representations commonly including capitalization, authority and validity. In a limited number of transactions, exceptions also
included intellectual property representations.
6 Includes two transactions where the limit was below the escrow amount.
7 One transaction not including an escrow at closing did require funding of escrow with proceeds of earnout payments.
8 Excludes transactions which also specifically referred to representation and warranty insurance as recourse for the buyer.
9 Length of time does not include transactions where such time period cannot be ascertained from publicly available documentation.
10 A “hybrid” approach with both a deductible and a threshold was used in another 8% of these transactions in 2012, 8% of these transactions in 2013, and 8% of these transactions in 2015.
11 Generally, exceptions were for general economic and industry conditions.
12 Includes one transaction where the specified exceptions apply for purposes of a standalone “material adverse effect” closing condition and certain representations, but do not apply for purposes of other representations.
13 The only transaction not including such exceptions provided for a closing on the same day the definitive agreement was signed.You can also read
