Venture market impressions

The technology group of law firm Lowenstein Sandler recently released results of its Third annual Venture Terms Survey, which polled 39 senior investment professionals and general counsel at venture capital and private equity firms across the US. The firm cautioned that its survey is more ?impressionistic? than empirical.

Many of the participants in the survey met recently in the New York offices of Lowenstein Sandler to discuss the latest resuts. Three aspects of the survey results stand out, they agreed. One is the stage-level differentiation in participation rights. ?The early stage investors were very consistent in reporting that they were getting unfettered participation rights,? Ray Thek, a partner and co-chair of the technology group at Lowenstein Sandler, told PEI Manager. ?as we moved into the later stages, investors reported that participation rights were less common or were, at least, circumscribed.?

Another stand-out was escrow. Contrary to market buzz, there has not been an increase in the use of escrow. The third standout aspect is in the pay-to-play provision. Says Thek: ?The response to the survey was quite uniform in that investors reported that they were prepared to implement pay-to-play provisions and use them where necessary. However, our recent experience has been that investors are extremely reluctant to use pay-to-play provisions. When it comes time to enforce the provision it's much more of a negotiation.? The responses to the escrow and pay-to-play questions did not appear to vary according to the stage of investment, adds Thek.

Although not reflected in the survey results, Sarah Reed, general counsel at Waltham, Massachusetts-based Charles River Ventures, has observed a convergence between East Coast and West Coast deals. Says Reed: ?Personal representation and warranties from the founders have become less common in East Coast deals. Redemption rights used to be rare in West Coast deals, and that's more common now. West Coast entrepreneurs have in my experience generally become more accepting of protective provisions for the investors ? both rights that run with the stock and special rights investors have at the board level. On both coasts, it's typical to see drag-a-longs of some type in early stage deals now.?

The results of the survey is available at http://www.lowenstein.com/files/upload/VentureTerms2007Survey.pdf