Venture Firms Seek Stronger Deal Terms as Leverage Shifts Back to Investors

Fenwick startup & venture capital practice chairs Cindy Hess and Mark Leahy talked to the Wall Street Journal about how venture capitalists are seeking stronger deal terms to hedge their risks, improve investment prospects and strengthen their control of companies during the COVID-19 pandemic.

Hess and Leahy told the Wall Street Journal that before the pandemic, entrepreneurs had a broader selection of investors because the industry was filled with record amounts of capital from venture investors and other crossover, hedge fund and corporate backers.

But now that capital has become more scarce, Hess and Leahy noted, entrepreneurs are having to accept investor-friendly deal terms, ranging from downside protections to methods for increasing investor control of startups.

“There are some terms we’ve seen from prior downturns such as the dot-com bust and the 2008 financial crisis. We’ve seen some of those come back into play,” Leahy said.

Hess told the Wall Street Journal that for companies doing well, these investor-friendly terms come up less, saying, “The strongest companies don’t see those tough provisions.”

She also mentioned that companies are looking at a range of options to survive besides equity funding, such as debt lines, government funding options, cost-cutting and furloughs, noting that “Companies are trying to be creative and pursue lots of available options.”

The full article is available on the Wall Street Journal​ (subscription required).