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CVC: Understanding Down-Market Venture Deal Structures

Webinar Date: May 14, 2020

It has been quite some time since the venture market has seen regular usage of down-rounds, cram-downs, pay-to-plays and similar down-market financing structures, but it is likely that the road ahead will be paved from time to time with these more complicated deal structures as compared to the straightforward structures and terms of the long up-market of the last decade.

This informative discussion—led by Fenwick corporate partners Ian Goldstein and Evan Bienstock and moderated by James Mawson, founder and editor-in-chief of Global Corporate Venturing—is designed to help CVCs better understand these deal structures.

Key Takeaways

  1. Expect challenging times ahead. Down-market financing structures are already here and we will see them with greater regularity in the months to come. Such financings require careful attention as they can be complicated, risky and adversarial.
  2. Evaluate your portfolio and plan ahead. Evaluate your portfolio companies and their cap tables and transaction documents for a clear picture of the current “lay of the land,” with a particular focus on your portfolio companies that will need to complete financings in the next six to nine months. Being organized with your portfolio company boards and planning ahead will be time well-spent.
  3. Communicate and strengthen relationships. Increase your cadence of communication with your portfolio company CEOs and with your main co-investors to ensure alignment heading into your next financing round.
  4. Pay attention to impacts on key employees. Down-market financing structures often have significant impact on value of the common stock. Careful consideration must be given as to how to re-incentivize the key employees of the company who will drive the business forward.
  5. Fill vacant board seats now. Many independent director seats remain vacant on portfolio company boards. Consider filling those seats now as independent directors can be valuable facilitators in getting difficult financings completed and reducing risks associated with insider rounds.
  6. Good process is critical. Consider and implement appropriate risk mitigation tools, including: using independent board committees; engaging outside financial advisors; conducting an extensive search for alternative sources of financing; negotiating for better terms; establishing a detailed record of the search, evaluation and approval processes (including holding meetings and not just acting by written consent); providing for adequate disclosure to stockholders; properly addressing conflicts of interest; obtaining all necessary corporate approvals (and obtaining disinterested stockholder votes, where possible) and providing for rights offerings.
  7. Have a bias towards simplicity. Although initial objectives may be to streamline cap tables as part of a down-market financing, it is easy for complexity to creep back into the picture through different pull-up, pull-through and other pay-to-play and recap structures. Try to avoid unnecessary complexity to ensure alignment of interests among different stockholder constituencies going forward.