Thursday, March 1, 2012

The notable rise in senior preference in VC financings

There's a lot of good news coming out of Silicon Valley these days - and for a community that lives on growth the statistics about venture financings are a great leading indicator of how people feel about that very growth.

Wilson Sonsini keeps statistics about the financings they see (where they represent the company or the investors) and produces a quarterly report of the trends. For Q42011, for example, you can see the up financings are up, and down financings are down - always good to see and a clear sign of the ongoing recovery.

But while the raw statistics might look promising, these is a darker lining that shows that the entrepreneurs are not 100% back in the power seat -- there is a big jump in the percentage of senior preferences. This means the later investors, paying up for higher valuations, are able to insist that they get paid back first on a sale. So while companies are doing well in increasing their valuations, they do not have enough bargaining power to fully protect prior investors and their employees are now third on the list to get paid.

You can see the trade off between valuation, dilution, control and seniority playing out in these statistics.

"The most notable trend in Q4 2011 was the increase in the use of senior liquidation preferences as compared with pari passu liquidation preferences. Senior liquidation preferences were used in 58% of deals in Q4 2011, significantly higher than the 42% figure in Q3 and the 47% figures in both Q1 and Q2. Senior liquidation preferences were used in a full 100% of down rounds, up from 75% in Q3, and were even used in 42% of up rounds, an increase of 14 percentage points over the 28% figure for Q3. This trend most likely reflects increasing valuations, as later-stage investors request seniority in exchange for higher valuations"

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