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Venture Capital Report
2021
Attorney Advertising
2021 Venture Capital Report – What’s Inside
2 US Market Review and Outlook
6 Regional Market Review and Outlook
10 Selected WilmerHale Venture Capital Financings
12 Law Firm Rankings
13 Management Carve-Out Plans in Sales of Private Companies
Technique Provides Retention Incentive When Common Stock Has Little Value
15 Cross-Border Operations? Transfer Pricing Required
Early-Stage Companies Ignore Compliance at Their Own Risk
16 SEC Rule Amendments Expand the Pre-IPO Financing Toolkit
Recent Changes Broaden Exemptions and Facilitate Investor Communications
17 Trends in VC-Backed Company M&A Deal Terms
18 Trends in Convertible Note and SAFE Terms
19 Trends in Venture Capital Financing Terms2 US Market Review and Outlook
REVIEW US Venture Capital Financings – 2000 to 2020
D
# of deals $ in billions
espite the arrival of the COVID-19
pandemic in early 2020 and the 12,372
11,920
164.1
11,346 11,356
ensuing economic dislocation, venture 10,697 10,948
10,139 134.6
capital financing proceeds, median 9,513 126.7
amount raised, and median pre-money 8,057
valuation all increased from 2019 levels, 6,906
83.4
78.7
86.8
although reported deal flow dipped. 4,858 4,583
5,531 71.5
4,394
50.8 46.8
3,387 44.5
VC-backed company liquidity activity 2,960
2,209 2,280 2,662
3,034
29.5
37.7 37.0
31.6
41.4
1,850 25.2 27.0
followed a similar pattern in 2020. The 19.8 18.7 21.8 23.7
number of VC-backed IPOs increased,
while M&A activity declined modestly, 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
but the median pre-money valuation Source: PitchBook
at the time of IPO and the median
acquisition price both reached their
highest levels in more than 15 years.
EQUITY FINANCING ACTIVITY
The number of venture capital
financings contracted by 4%, from Median Size of US Venture Capital Financings – 2000 to 2020
12,272 in 2019 to 11,920 in 2020. Once Angel/Seed Early Stage VC Later Stage VC $ millions
all financings are counted, the gap 21.0
between the two years is likely to close.
The record $164.1 billion invested in 15.0
the US venture capital ecosystem in
2020 represents an increase of 22% 10.0
9.0 9.4
10.0 10.0 10.0
8.4 8.8 8.5
from the $134.6 billion in 2019. 8.1
7.5 8.0 8.0
7.2 7.0
8.0 8.2 8.2
6.0 6.0 6.4 6.0 6.0 6.5
5.0 4.9 4.9 5.0
Overall, the median size of venture 4.2 4.5 4.0 3.7
3.0 2.8 3.0 3.5 4.0 4.4
2.6 2.6
capital financings increased by 9%, from 1.8
1.0 0.7 0.7 0.7 0.7 0.8 0.6 0.6 0.5 0.5 0.5 0.5 0.5 0.6 0.7 0.8 1.0 1.1 1.2 1.4
$2.8 million in 2019 to $3.0 million in 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
2020—the highest annual level since
Source: PitchBook
2008, when angel and seed financings
comprised a smaller portion of the market. sectors, median financing size reached occurred in 2018, when the total jumped
The median size of angel and seed its highest annual level since 2008. to 208, from 112 in 2017 and 77 in 2016.
financings increased by 15%, from $1.2 The number of very large financings Increases in super-sized rounds are driven
million in 2019 to $1.4 million in 2020. rounds continued to grow in 2020. There largely by private equity, crossover and
The median size of early-stage financings were 750 financing rounds of at least hedge funds, which are attracted to pre-
increased by 8%, from $6.0 million $50 million in 2020, up 24% from 603 in IPO companies that can offer the potential
to $6.5 million. At $10.0 million, the 2019, continuing a trend that saw rounds for sizeable investment returns, especially
median size of later-stage financings in of this size grow from 242 in 2016 to when investors are able to negotiate ratchet
2020 matched the prior year’s figure. 331 in 2017, and then to 534 in 2018. or other provisions guaranteeing them a
Median financing amounts at each minimum return at the time of an IPO,
financing stage have either increased or The number of financing rounds of at
typically in the form of additional shares if
remained steady each year since 2013. least $100 million show a similar pattern,
the offering occurs below a specified price.
as VC-backed companies increasingly
The median financing size for life sciences rely on “IPO-sized” later-stage rounds of There were five billion-dollar financing
companies increased by one-third, from financing. There were 330 financing rounds rounds in 2020. This elite club was led by
$3.4 million in 2019 to $4.5 million in raising at least $100 million in 2020, a Waymo, with its $3.0 billion financing,
2020. Among technology companies, 33% increase from the 248 rounds in 2019. followed by Rivian Automotive ($2.5
the median financing size grew by 11%, This jump, in turn, followed the 86% surge billion), SpaceX ($1.9 billion), Epic Games
from $3.3 million to $3.7 million. In both in $100-million financing rounds that ($1.78 billion) and Generate ($1.0 billion).3 US Market Review and Outlook
The median pre-money valuation for all Median Pre-Money Valuation in US Venture Capital Financings – 2000 to 2020
venture financings continued its upward Angel/Seed Early Stage VC Later Stage VC $ millions
trajectory, increasing 17%, from $17.1
93
million in 2019 to $20.0 million in 2020.
Among angel and seed rounds, the median 75
pre-money valuation held steady at $7.0 65
60
million in each of the last two years. The
50
median pre-money valuation in early-stage 46
43
47
40 40 39
rounds increased 12%, from $26.9 million 37 37
34
31
38
30 30 30
in 2019 to $30.0 million in 2020, while 23 23
26
23
27
18 17 18
later-stage rounds saw a 15% increase, 9
14
10 9 10 10 10 10 10 12 14 15
6 8 8 8 8 6 6 7 7
from $65.0 million to $75.0 million. 3 5 4 4 4 3 4 3 4 4 4 4 5 5 5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
The median pre-money valuation in the
technology sector increased 11%, from Source: PitchBook
$18.0 million in 2019 to $20 million in
2020. Among life sciences companies,
the median pre-money valuation jumped
49%, from $17.5 million to $26.0 million.
Angel and seed financings accounted
for 42% of all venture financings in 2020
(down from 44% in 2019) and represented
US Venture Capital Financings by Industry – 2000 to 2020
6% of all venture capital financing Biopharmaceuticals Medical Devices Other Life Sciences Software Communications & Networking Other Tech
proceeds (down from 8% in 2019). Early- Life Sciences 4,608 4,524 4,472
4,642
4,445
4,200
stage financings accounted for 29% of Technology 4,093
3,987
all financings in 2020 (down from 32% 3,431
in 2020) and 26% of all proceeds (down 2,912
2,780
from 33% in 2019). Later-stage financings 2,252 2,389
2,621
2,207
accounted for 28% of all financings in 1,730
1,879
2,089
1,856 1,846
2,085 1,990
1,585 1,692
2020 (up from 24% in 2019) and 67% of 1,166 1,194
1,333
1,512
1,246
1,415
1,544
1,087 1,089 1,107
all proceeds (up from 59% in 2019). 731 813
1,027
655
513 533
372 343
The technology sector accounted for
37% of the year’s financings in 2020, 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
down from 38% in 2019. The life Source: PitchBook
sciences sector’s market share increased
to 23% in 2020 from 21% in 2019. The LIQUIDITY ACTIVITY The median offering size for US VC-
market share for consumer goods and backed IPOs increased by 65%, from $110.5
services companies declined from 21% The number of IPOs by VC-backed US million in 2019 to $182.7 million in 2020.
in 2019 to 19% in 2020, while business issuers increased by 32%, from 72 in
2019 to 95 in 2020—the highest annual In 2020, life sciences companies accounted
services companies saw their market
figure since the 102 in 2014. VC-backed for 70% of all VC-backed IPOs, up from
share increase from 13% to 14%.
companies accounted for 64% of all US- their 59% market share in 2019 and the
California produced 34% of all venture issuer IPOs in 2020, down slightly from 62% that prevailed over the five-year period
financings in 2020 (4,037 financings) their 65% share of the market in 2019. from 2014 to 2018. The VC-backed IPO
and 51% of the year’s proceeds ($84.43 market share for technology companies
billion). New York, home to companies Gross IPO proceeds raised by VC-backed declined to 27% in 2020 from 40% in 2019,
with 1,475 financings raising $18.53 US issuers increased by 21%, from $25.04 compared to the 36% market share over
billion in 2020, finished second in the billion in 2019 to $30.38 billion in 2020. the five-year period from 2014 to 2018.
state rankings, followed by Massachusetts There were five billion-dollar IPOs by
VC-backed US issuers in 2020, a tally The median time from initial funding
(with 860 financings raising $17.05 billion),
equal to 2019. The largest 2020 IPO was the to IPO declined from 6.6 years in 2019
Texas (with 593 financings raising $5.00
$3.49 billion offering of Airbnb, followed to 5.3 years in 2020, the second-lowest
billion), Washington (with 427 financings
by the IPOs of DoorDash ($3.37 billion), figure since 2009.
raising $4.88 billion) and Colorado (with
372 financings raising $2.50 billion). Snowflake ($3.36 billion), Unity Software
The median amount raised prior to an IPO
($1.30 billion) and Wish ($1.10 billion).
increased by 27%, from $131.8 million in4 US Market Review and Outlook
2019 to $167.1 million in 2020, while the Venture Capital–Backed IPOs and Median Time to IPO – 2000 to 2020
median pre-IPO valuation climbed by 60%, # of deals Median time from initial equity funding to IPO (in years)
from $360.5 million to $577.5 million. As
201 7.5
a result, the ratio of pre-IPO valuation 7.4
7.1 7.0
7.2
6.6 6.6 6.6
to the median amount raised prior to an 6.0
6.3
IPO increased from 2.8:1 in 2019 to 3.5:1 5.2 5.1 5.2
5.5
5.3
4.9
in 2020—equal to the 3.5:1 in 2017 and 4.5 4.6 4.5
the highest level since 2012 (a higher ratio 3.8 102
95
3.1
means better returns to pre-IPO investors). 72 72 75 72
63 63
48 51 50
The average 2020 VC-backed US issuer 43 43 42 39
25 23
IPO gained 104% from its offering 20
7 9
price through year-end. At the end
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
of 2020, 80% of the year’s VC-backed
IPO class were trading above their Source: SEC filings and PitchBook
offering price, up from 57% in 2019. The above chart is based on US IPOs by VC-backed US issuers.
The number of reported acquisitions of
VC-backed companies declined by 9%,
from 1,018 in 2019 to 930 in 2020. Total
reported proceeds decreased by 5%, from
$92.7 billion to $87.9 billion. Once all 2020
acquisitions are accounted for, however,
Median Amount Raised Prior to IPO and Median Pre-IPO Valuation – 2000 to 2020
the year’s totals for deals and proceeds Median amount raised prior to IPO Median pre-IPO valuation $ millions
should approach or exceed those of 2019. 572 577
The median acquisition price increased
by 16%, from $75.0 million in 2019 to
373
$87.1 million in 2020. The median time 331 336
361
303 306
from initial funding to acquisition 262
246 243 240
increased from 4.9 years in 2019 to a 203
186
219
178
record annual high of 5.0 years in 2020. 160
140 153
133 132
167
103 111
86 79 87 89
63 67 70 72 67
The median amount raised prior to 42 38 40 46 51 51 49
29
56
acquisition increased by 16%, from
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
$9.4 million in 2019 to $10.9 million
Source: PitchBook
in 2020—the highest annual figure
since the $11.3 million in 2011. of 25 that prevailed during the five- through M&A transactions than through
After three consecutive annual increases, year period from 2014 to 2018. IPOs in 2020, with a median time of 5.0
the ratio of median acquisition price to years from initial funding to acquisition,
The year also saw 23 billion-dollar
median amount raised prior to acquisition compared to a median of 5.3 years from
acquisitions, up from 19 in 2019. The
remained steady at 8.0:1 in 2020 (a higher initial funding to IPO. This fact, combined
largest deal of 2020 was the $7.1 billion
ratio means higher returns to pre- with the tendency of M&A transactions
acquisition of Credit Karma by Intuit,
acquisition investors). The 2020 figure to yield the bulk of the purchase price in
followed by the $4.9 billion acquisition of
was the second-highest ratio since the cash at closing—whereas IPOs generally
Forty Seven by Gilead Sciences, the $4.0
12.5:1 recorded in 2000, at the apex of the involve a post-IPO lockup period of 180
billion acquisition of AskBio by Bayer
dot-com delirium, behind only the 8.8:1 days and market uncertainty as to the
and the $4.0 billion acquisition of Uber
recorded in 2016. The increase in this ratio timing and prices of subsequent stock
Advanced Technologies Group by Aurora.
reflects the combination of significantly sales—makes it easy to see why investors
higher acquisition prices and lower Based on the valuations achieved in often prefer a company sale to an IPO.
levels of pre-acquisition investments. company sales and IPOs compared
While company sales continue to far
to the financing amounts required to
There were 38 VC-backed company outpace IPOs as liquidity events, the
achieve each type of liquidity event, 2020
acquisitions of at least $500 million ratio of M&A transactions to IPOs
marked the ninth consecutive year in
in 2020, a total that represented a 15% for VC-backed companies declined
which returns to venture capital investors
increase over the 33 in 2019 and a from 14.1:1 in 2019 to 9.8:1 in 2020.
were higher in M&A transactions than
52% increase over the annual average in IPOs. Liquidity also arrived sooner5 US Market Review and Outlook
OUTLOOK Acquisitions of US Venture-Backed Companies and Median Time to M&A – 2000 to 2020
# of deals Median time from initial equity funding to M&A (in years)
Results over the coming year will
1,018
depend on a variety of factors, 4.7 4.7 4.7 4.8 4.9 4.9 5.0
4.6 939 930
including the following: 4.3 4.3 4.2
4.4
851
4.1
902
843
4.3 873
3.9 4.0
742 3.6
––Financing Activity: Predictions that 3.3
727
619
the COVID-19 pandemic would lead 605
2.5
to a sharp contraction in venture 471
418 439
409
capital activity, reductions in pre- 315
1.8
301
1.8
335 345
266 274
money valuations, and a potential
private capital crunch in 2020 proved
incorrect. While the pandemic has not
yet run its course and the timing and 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
extent of economic recovery remains Source: PitchBook
uncertain, the combination of ample
funds for investment (venture capital
fundraising reached a record of $73.6
billion in 2020) and the prospect of
gradual economic recovery suggest a
favorable environment for venture capital
financing activity in the coming year.
Median Amount Raised Prior to Acquisition and Median Acquisition Price – 2000 to 2020
––Attractive Sectors: Companies offering Median amount raised prior to acquisition Median acquisition price $ millions
products or services to meet the 125
demands of remote work or address
health and safety consequences of the
COVID-19 pandemic should remain 87
attractive financing candidates, while 67
75
65
those operating in industries hard-hit 56
49 50
by the pandemic will likely continue to 41 40
46 44 45 45
34 36 34 37 34
struggle to adjust to the “new normal.” 30
22 20 20 22
In addition, companies that leverage 10
16 19 16 16 15 15 14 11 10 10 11 11
7 9 7 8 9
blockchain technology, AI, machine
learning and voice technology to 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
continue the digital transformation Source: PitchBook
of business processes should attract
funding in 2021. Other sectors that technology industry, have opted to delay purpose acquisition companies (SPACs)
should receive significant investment their public debuts, often relying on seeking acquisitions provides all private
include digital health, security, consumer private “IPO-sized” crossover rounds companies with a new pool of potential
e-commerce, robotics, fintech and agtech. to meet their financing needs and to acquirers. Acquisition prices cannot
Innovative life sciences companies, scale up before going public. The solid increase indefinitely, but companies with
and those with compelling market aftermarket performance of prominent differentiated market positions and strong
opportunities—such as in immuno- VC-backed IPOs in 2020 should, however, growth potential are likely to continue
oncology and gene therapy—should spur more VC-backed companies to to attract premium acquisition prices.
also continue to appeal to investors. pursue IPOs in the coming year.
Venture capital financing and liquidity
––IPOs: Although it was intended to ––Acquisitions: M&A activity in the coming activity in 2021 is off to a promising start.
encourage emerging growth companies year should be bolstered by several The number of financings in the first
(EGCs) to go public, the JOBS Act— factors. The historically low interest quarter increased 3% from the fourth
combined with other changes in rate environment should encourage quarter of 2020, while total proceeds
regulatory requirements and the strategic acquirers to supplement jumped 65%. The first quarter produced
availability of large amounts of private organic growth with debt-financed 54 VC-backed IPOs, up from 40 in the
investment capital—has made it easier acquisitions. Some companies will prior quarter (representing the highest
for VC-backed companies to stay likely pursue acquisitions to respond to quarterly tally since the third quarter of
private longer. As a result, many VC- the acceleration of changes in business 2000). With 297 VC-backed company
backed companies, particularly in the practices resulting from the pandemic. acquisitions, M&A deal flow also reached a
The large and growing number of special record level in the first quarter of 2021. <6 Regional Market Review and Outlook
CALIFORNIA California Venture Capital Financings – 2000 to 2020
C
# of deals $ in billions
alifornia companies reported 4,037
financings in 2020, a decline of 5% 4,256
4,037
84.4
3,904 3,978
from the 4,256 in 2019. California was 3,844
3,554
3,808
responsible for 34% of all US financing 3,305 66.4 66.2
transactions in 2020, matching its 2,833
2,434
market share in the prior year. 43.0 42.4 43.0
1,851 1,875 36.8
1,694 1,681
Total proceeds grew 28%, from 1,389
1,150 21.8 1,191 21.9
$66.20 billion in 2019 to $84.43 840 880
1,036
16.2 16.8
19.7 21.0
717 13.8 13.5 14.1
billion in 2020, partly due to an 11.2 9.2 8.3 9.6 11.1
increase in large financings.
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
The number of rounds raising $50 million
Source: PitchBook
or more rose by 24%, from 307 to 381,
while the number of rounds of $100
million or more increased by 35%, from
133 to 180. California-based companies
accounted for 51% of all financing rounds
in the country raising $50 million or more
in 2020, equal to the percentage in 2019.
California Venture Capital Financings by Selected Industry – 2000 to 2020
Technology was the largest sector in the
Biopharmaceuticals Medical Devices Other Life Sciences Software Communications & Networking Other Tech
state, producing 43% of all California
Life Sciences 1,940
financings in 2020, followed by life sciences 1,855 1,803 1,846
1,751
Technology 1,701
(20%), consumer goods and services 1,645 1,609
(18%), and business services (13%). 1,445
1,192
The number of IPOs by California-based
932
VC-backed companies increased for the 728
866
811
891
725 767 806
729 677
fourth consecutive year, growing 17%, 616
523
595 594 626
504 501 462
453
from 36 in 2019 to 42 in 2020. California 312 333 324 335
402 401
282
was home to just over half of the 20 largest 120 131 180 208 214 232
VC-backed IPOs by US issuers in 2020,
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
compared to three-quarters in 2019. The
largest was Airbnb’s $3.49 billion IPO, Source: PitchBook
followed by the IPOs of DoorDash ($3.37
billion) and Snowflake ($3.36 billion).
The number of reported acquisitions of
California VC-backed companies declined
by 6%, from 377 in 2019 to 355 in 2020. The
state’s largest deals were the $7.1 billion
acquisition of Credit Karma by Intuit, the California Venture-Backed IPOs and Acquisitions – 2000 to 2020
$4.9 billion acquisition of Forty Seven by # of IPOs # of acquisitions
Gilead Sciences, the $3.2 billion acquisition 369 377
356
of Segment by Twilio, and the $2.75 325
355
338
326
355
314
billion acquisition of VelosBio by Merck.
275 267
California will undoubtedly maintain its
202
venture capital leadership in the coming 187 178
year. Financing and liquidity activity in 136 137 129
148
125 120
2021 will depend on the level of venture 95
113
capital fundraising, macroeconomic 44 42
34 33 33 36
conditions, the willingness of strategic 13 7 11 14 16
29
3 2
19 22 27 30
12 18
buyers to pay attractive prices, and IPO 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
market conditions, among other factors.
Source: SEC filings and PitchBook7 Regional Market Review and Outlook
MID-ATLANTIC Mid-Atlantic Venture Capital Financings – 2000 to 2020
# of deals $ in billions
With 772 rounds, the number of reported
2020 venture capital financings in the 748
787 772 7.0
mid-Atlantic region of Virginia, Maryland, 659
701
6.0
630
North Carolina, Delaware and the District 627
545
of Columbia represented a decline of 4.2
454
2% from the 787 financings in 2019. 3.5 392 3.6
3.3
320 331
Buoyed by an increase in the number of 281
2.1
261 2.2
2.4
214 224 218 1.9 2.0
large financings, total proceeds in the mid- 136
1.7
171 172 172 1.6 1.6
1.8 1.8
1.5
1.2 1.1 1.1
1.0
Atlantic region increased by 66%, from
$4.25 billion in 2019 to $7.04 billion in
2020. The number of mid-Atlantic rounds 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
raising $50 million or more increased by Source: PitchBook
47%, from 17 in 2019 to 25 in 2020, while
the number of rounds raising $100 million
or more increased from three to eight.
North Carolina led the mid-Atlantic
region in both deal volume and proceeds
in 2020, with 228 financings raising $3.60
billion, followed by Virginia with 176 Mid-Atlantic Venture Capital Financings by Selected Industry – 2000 to 2020
financings ($1.16 billion) and Maryland Biopharmaceuticals Medical Devices Other Life Sciences Software Communications & Networking Other Tech
with 148 financings ($1.20 billion). Life Sciences 296 289
278 280
Technology 270 263 266
Technology companies accounted for 261
37% of all mid-Atlantic financings in
202
2020—extending the sector’s longstanding 171
190 192
163 170
leadership in the region—followed by 136 140 143 150
127 134
life sciences (25%), consumer goods and 116
104
121
102 102 100
116
96 94
services (17%), and business services (14%). 79 85 81
72 71
87 88
65 64
55 50
The region generated three VC-backed 34 32
IPOs in 2020, equal to the count for
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
2019, led by a pair of Delaware-based
companies—nCino ($250 million) and Source: PitchBook
Prelude Therapeutics ($158 million).
The number of reported acquisitions
of mid-Atlantic VC-backed companies
dipped from 58 in 2020 to 57 to
2019. Virginia generated 22 deals,
followed by Maryland with 15 deals
and North Carolina with 11 deals. Mid-Atlantic Venture-Backed IPOs and Acquisitions – 2000 to 2020
# of IPOs # of acquisitions
The region’s largest M&A transaction of
60
the year was the $4.0 billion acquisition 58 57
of AskBio by Bayer, followed by the $2.75
46
billion acquisition of EdgeConneX by 44 43 44
39 39
EQT Infrastructure, and the $425 million
33 32
acquisition of OncoImmune by Merck. 28 27
31
26 26
24 24
With a strong venture capital ecosystem, 16
19
15
the mid-Atlantic region should be 14
poised for growth in financing and 4
6
4 3 4
7 6 5 4 3 3
1 1 2 2 1 2 2
liquidity activity in the coming year 0 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
if market conditions are conducive.
Source: SEC filings and PitchBook8 Regional Market Review and Outlook
NEW ENGLAND New England Venture Capital Financings – 2000 to 2020
# of deals $ in billions
New England companies reported
1,130 venture capital financings in 1,130 18.6
1,037
2020, an increase of 9% from the 1,037 975 949
981
905
financings in 2019. Total proceeds were 872 844
786 13.1 12.8
$18.61 billion, an increase of 45% from 675 10.7
the $12.82 billion in the prior year. 540
570
628
9.2
508 8.0
443 6.9
Massachusetts, the perennial leader in 386 386 403
5.8
6.4
321 316 5.2 5.3
New England and the nation’s third- 262
3.2 3.6 3.7
4.4
3.3
4.3 4.7
2.9 2.8 2.9
largest source of VC financings, led the
region in 2020, with 860 financings
and $17.05 billion in proceeds. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: PitchBook
The number of rounds raising $50 million
or more increased by 32%, from 87 in 2019
to 115 in 2020, while the number of rounds
raising $100 million or more increased
by 82%, from 26 to 47. The largest rounds
in 2020 came from Indigo Agriculture
($535 million), XtalPi ($319 million) and
Tessera Therapeutics ($230 million). New England Venture Capital Financings by Selected Industry – 2000 to 2020
Biopharmaceuticals Medical Devices Other Life Sciences Software Communications & Networking Other Tech
The life sciences sector increased its Life Sciences
share of New England venture capital Technology 455
financings for the sixth consecutive year,
representing 40% of the region’s total in 345 348 347 356
321
2020 (up from 34% in 2019), followed by 294
315
299 308 315 305
266 274 273
technology (27%), consumer goods and 249 244 256
225
264
244
216 214
services (14%), and business services (12%). 170 181 183
170 170 172
192 201 202
151 152 151
126
The number of VC-backed IPOs by New 87
105 110
78 77
England–based companies increased by 55
86%, from 14 in 2019 to 26 in 2020, to
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
become the highest annual tally since 2000.
All the region’s VC-backed IPOs were by Source: PitchBook
Massachusetts-based companies, and all
but one were by life sciences companies—
the remaining IPO, the largest of 2020, was
by telehealth company American Well.
The number of reported acquisitions of
VC-backed companies in New England
decreased by 16%, from 96 in 2019 to New England Venture-Backed IPOs and Acquisitions – 2000 to 2020
81 in 2020, of which Massachusetts # of IPOs # of acquisitions
contributed 65. The region’s largest M&A 100
96
transaction was the $2.1 billion acquisition 90
of Corvidia by Novo Nordisk, followed 81 80 82 82 81
72 73
by the $539 million acquisition of Censa
62 62 62
Pharmaceuticals by PTC Therapeutics. 52
55 56
51
44
With its concentration of world-renowned 38 39
32
universities and research institutions, 25 25 26
21
New England—and Massachusetts in 18
12 14 14
9 9
particular—should remain a hub of 1 3
7 8 6
2 3 4
7
0 0
venture capital and IPO activity during 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
the coming year, particularly in the
Source: SEC filings and PitchBook
life sciences and technology sectors.9 Regional Market Review and Outlook
TRI-STATE Tri-State Venture Capital Financings – 2000 to 2020
# of deals $ in billions
The number of reported venture capital
financings in the tri-state region of New 2,046 21.8
1,960
21.9
York, New Jersey and Pennsylvania 1,805
1,693
1,815
1,671 18.1
declined by 4%, from 2,046 in 2019 to 1,581
1,450
1,960 in 2020, while total proceeds inched 13.5
1,184 12.7
up, from $21.79 billion to $21.85 billion. 1,045 11.6
809 9.2
New York, the nation’s second-largest 631 600
source of VC financings, led the tri-state 360
5.5
395
518
4.0 4.3
5.0
4.3
5.5
296 3.6
region in 2020, with 1,475 financings 218
3.0
228
1.6
249
1.9
271
2.0 2.4
3.0 2.7
and $18.53 billion in proceeds.
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
The number of rounds raising $50 million
Source: PitchBook
or more increased by 23%, from 90 in
2019 to 111 in 2020, while the number of
rounds of $100 million or more increased
by 18%, from 40 to 47. The region’s
largest financing came from goPuff ($380
million), Everest Medicines ($310 million)
and You & Mr Jones ($260 million).
Tri-State Venture Capital Financings by Selected Industry – 2000 to 2020
Technology companies accounted
Biopharmaceuticals Medical Devices Other Life Sciences Software Communications & Networking Other Tech
for 36% of the tri-state region’s VC
Life Sciences 737
financings in 2020, followed by consumer 688 686 702
Technology 665
goods and services (24%), life sciences 590
624 621
(20%), and business services (14%).
454
There were twelve VC-backed IPOs in 419
395
359
the tri-state region in 2020, up from 297 294
278
eleven in 2019—equaling the region’s 247
219 211
235 239
179
highest annual figure since 2000. New 175
115
146
168
116 120
154 150
174
106 106 114 116 105 112
York produced six VC-backed IPOs, 43 40 52 55 73 81
with Pennsylvania contributing four
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
and New Jersey accounting for the
remaining two. The largest venture- Source: PitchBook
backed IPOs were from Vroom ($468
million), Legend Biotech ($424 million)
and Lemonade ($319 million).
The number of reported acquisitions of
VC-backed companies in the tri-state
region declined by 17%, from 169 in
2019 to 140 in 2020. New York generated Tri-State Venture-Backed IPOs and Acquisitions – 2000 to 2020
106 deals in 2020 (down from 121 in # of IPOs # of acquisitions
2019), followed by Pennsylvania with 169
19 and New Jersey with 15. The largest
142 140 140
deals were the $4.0 billion acquisition of 132
121 124
Uber Advanced Technologies Group by 108
116
Aurora and the $500 million acquisition
of Mirror by Lululemon Athletica.
63
55 58
52 52
With strength across a broad array of 44 40
37
industry sectors, the tri-state region 30 31
22 22
15
should continue to produce attractive 2 5 1
9 5
10 6
1 1
8
1
7 9 12
7 3
8 7 11 12
financing candidates and, assuming 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
conducive market conditions, further
Source: SEC filings and PitchBook
growth in liquidity events. <WilmerHale has helped thousands of startups go from formation to funding to business expansion,
with many going on to market leadership and successful IPOs or acquisitions.
We have handled more than 250 venture financings raising in excess of $14 billion since the beginning of 2020, adding to a record that, over the past decade,
has included more than 2,500 venture financings with total proceeds in excess of $50 billion.
$110,000,000 $15,000,000 $125,000,000 $10,500,000 $57,600,000 $65,000,000 $33,700,000 $150,000,000
Third Round First Round Late Stage First Round Second Round Third Round Second Round First Round
January 2020 December 2020 January 2021 October 2020 September 2020 October 2020 June 2020 December 2020
$25,000,000 $12,750,000 $12,000,000 $50,000,000 $13,700,000 $21,000,000 $17,000,000 $15,000,000 $56,700,000
First Round First Round Second Round First Round Third Round Third Round Second Round First Round Third Round
December 2020 December 2020 October 2020 November 2020 April 2020 December 2020 December 2020 November 2020 July 2020
$50,000,000 $80,000,000 $82,000,000 $47,000,000 $40,000,000 $94,000,000 $22,500,000 $91,500,000
Late Stage Second Round Fourth Round Second Round Fourth Round Second Round First Round Second Round
September 2020 March 2020 November 2020 December 2020 May 2020 January 2021 January 2021 June 2020
$115,000,000 $30,000,000 $100,000,000 $13,000,000 $145,000,000 $80,000,000 $72,000,000 $7,500,000 $95,000,000
Second Round Second Round Third Round First Round Late Stage First Round Second Round First Round Third Round
August 2020 May 2020 June 2020 May 2020 March 2020 January 2021 December 2020 December 2020 February 202112 Law Firm Rankings
Company Counsel in Eastern US VC-Backed IPOs – 1996 to 2020
Wilmer Cutler Pickering Hale and Dorr LLP 109
Goodwin Procter LLP 77
Cooley LLP 47
Morgan, Lewis & Bockius LLP 35
Latham & Watkins LLP 34
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. 18
Ropes & Gray LLP 17
Wilson Sonsini Goodrich & Rosati P.C. 17
DLA Piper LLP (US) 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
Troutman Pepper Hamilton Sanders LLP 9
Source: SEC filings
Counsel in Sales of Eastern US VC-Backed Companies – 1996 to 2020
Wilmer Cutler Pickering Hale and Dorr LLP 282
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP 237
Cooley LLP 196
Goodwin Procter LLP 173
DLA Piper LLP (US) 121
Wilson Sonsini Goodrich & Rosati, P.C.
P.C. 104
Morgan, Lewis & Bockius LLP 102
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. 85
Morris, Manning & Martin, LLP 73
Foley Hoag LLP 62
Ropes & Gray LLP 55
Locke Lord LLP 50
Nixon Peabody LLP 48
Hutchison PLLC 38
Latham & Watkins 38
Troutman Pepper Hamilton Sanders LLP 38
Source: Dow Jones VentureSource for 1996-2019 transactions and PitchBook for 2020 transactions
The above charts are based on VC-backed companies located east of the Mississippi River.Management Carve-Out Plans in Sales of Private Companies
13 TECHNIQUE PROVIDES RETENTION INCENTIVE WHEN COMMON STOCK HAS LITTLE VALUE
W hen a company is acquired, the
purchase price typically is allocated
among stockholders in the manner
more effective retention and recruiting
tool, since employees can be assured
of some type of payoff upon a sale of
at a higher sale price employee equity
interests become valuable again and a
carve-out plan is either unnecessary or
specified in the company’s corporate the company, while the latter approach the amount of compensation due creates
charter. In the sale of a venture capital– provides more flexibility to the board a barrier to the buyer’s retention efforts)?
backed company, holders of preferred of directors to reward those employees
who contribute the most to the company
––What is the payment timing? In an asset
stock are entitled to receive liquidation sale, what if the company needs to retain
through the time of sale, and can avoid
preferences before any proceeds are a portion of the sale proceeds for a period
some legal and tax complexities.
available for holders of common stock and of time to satisfy contingent obligations?
options. As a result, the allocation of sale ––Do plan participants’ interests ––Is the payment made in cash, or in the
proceeds in accordance with the corporate vest over time?
form of the consideration (including
charter may result in little or no proceeds ––If participants in the plan are designated stock) paid by the buyer? Does the buyer
being paid to the company’s management at the time of implementation, do they have flexibility to determine the form in
and other employees, with respect to lose their participation rights if they which payment is made—for example,
their equity holdings. In this event, leave the company prior to a sale? in order to comply with securities laws?
management may have little incentive to If so, what happens to the forfeited
remain with the company through the interests? Do they automatically accrue
––Is the amount payable to participants
reduced by the value received
negotiation of the deal, let alone during pro rata to the benefit of the other
for their equity interests in the
the period between the signing and participants, or is the total payoff to
acquisition of the company?
closing of an acquisition agreement. plan participants instead reduced?
A so-called “management carve-out plan” The second group of issues involves POSSIBLE STRUCTURES
can address this situation by providing the determination of the amount
to be paid to plan participants: Management carve-out plans often involve
for a portion of the acquisition price
difficult choices with respect to the terms
to be paid directly to management and ––Is the payment a fixed amount or and structure of the plan and challenging
other plan participants, instead of being based on the sale price? Is there a cap legal issues. Described below are four
allocated strictly in accordance with the on the amount paid under the plan? possible structures, and the principal
corporate charter. Management carve-out
plans are sometimes implemented long ––If the payment is based on the sale price, advantages and disadvantages of each.
how is the sale price determined for this
before a company begins a sale process
purpose? Is it the gross sale price or the Alternative One
and at other times are put in place at
net price after transaction expenses and Enter into retention agreements with
the time and in the context of a specific other offsets to the purchase price (such individual employees or establish
transaction. In recent years, management as debt)? How are earnouts and escrows a bonus plan with individual
carve-out plans have become less common accounted for? What about assumed or employees that provides for cash
in sales of private companies—likely due retained liabilities (including company
payments upon an acquisition.
to a substantial increase in valuations and taxes), or company wind-down expenses?
acquisition prices—but, when they have Primary advantages:
been used, their size (as a percentage of ––Does the payment accrue from the first
dollar, or apply only above a minimum ––Simple to implement—stockholder
the acquisition price) has increased.
sale price (to avoid rewarding employees approval is typically not required,
for a sale at an unattractive price) and/or and no new securities are issued
BASIC TERMS below a maximum sale price (because
A company that wishes to implement a
management carve-out plan must address COMPARISON OF ALTERNATIVE STRUCTURES
a number of often-complicated issues.
ALTERNATIVE ALTERNATIVE ALTERNATIVE ALTERNATIVE
The first set of issues relates to ONE TWO THREE FOUR
participation in the plan:
Complicated Complicated Very complicated
Ease of implementation Simple (if charter (charter amendment (charter amendment
––Who will participate—all employees, amendment involved) required) required)
certain designated employees,
or only management? Plan participation Flexible Flexible Inflexible Flexible
Acquiring company
––Are participants selected and economic forced to pay some cash
Yes No No No
interests in the plan allocated at the
time the plan is implemented or only Tax-deferred treatment
No No Yes Yes
possible
later, at the time the company is being
sold? The former approach should be a Capital gains possible No No Yes YesManagement Carve-Out Plans in Sales of Private Companies
14 TECHNIQUE PROVIDES RETENTION INCENTIVE WHEN COMMON STOCK HAS LITTLE VALUE
––Participation can be limited to specific ––If acquisition is structured as tax-free, ––Plan participants must either pay
persons (such as key employees) plan participants share in that benefit for the new stock or incur taxable
and subject to conditions (such as income upon receiving the stock
remaining employed through closing)
––In a taxable acquisition, payments to if issued without consideration
plan participants would typically be
Primary disadvantages: treated as capital gains (rather than ––Because the terms of the new class of
ordinary income), which would be stock include a liquidation preference
––Forces the buyer to pay a portion long-term if the common stock has that effectively guarantees some payment
of the acquisition price in cash been held for more than one year upon an acquisition, the fair market
(to fund payments under the value of the new stock (either paid by
plan), even if the buyer wishes to Primary disadvantages:
plan participants or recognized as taxable
use stock for the acquisition income) is generally not as low as the fair
––Payments are shared on a pro-rata basis
––Payments to plan participants are taxable by all holders (including non-employees) market value of ordinary common stock
as ordinary income, not capital gains of common stock and options, and cannot
be directed solely or disproportionately OTHER CONSIDERATIONS
Alternative Two to contributing employees
Depending on how it is structured,
Establish a plan providing for the payment ––Charter amendment required a management carve-out plan
of a portion of the acquisition price to
can raise a number of other legal
plan participants, often in the form of Alternative Four and tax issues, such as:
the consideration paid by the buyer. Create and issue a new class of stock,
the terms of which provide for the ––Possible issues under Section 280G
Primary advantages: (parachute payment provisions) or
payment of a specified portion of the
––Participation can be limited to specific Section 409A (deferred compensation
acquisition proceeds to the holders
persons (such as key employees) provisions), or ERISA concerns
of that class of stock.
and subject to conditions (such as ––Whether the implementation of the
remaining employed through closing) Primary advantages: plan is consistent with the fiduciary
––Does not force the buyer to pay a portion duties of the board of directors
––Participation can be limited to specific
of the acquisition price in cash persons (such as key employees) ––What consents or waivers are required to
and subject to conditions (such as implement the plan, such as stockholder
Primary disadvantages:
remaining employed through closing) approval of a charter amendment,
––Harder to implement than the first ––Does not force the buyer to pay a portion the waiver of anti-dilution provisions
alternative if a charter amendment of the acquisition price in cash and the waiver of preemptive rights
is required to avoid contravention of
preferred stock liquidation preferences ––If acquisition is structured as tax-free, CONCLUSION
plan participants share in that benefit
––Payments to plan participants are Management carve-out plans often
taxable at the time of receipt, even ––In taxable acquisition, payments to plan
participants would typically be treated involve difficult choices with respect
in a tax-free acquisition and even if
as capital gains (not ordinary income), to the terms and structure of the
payments are in the form of stock
that cannot be immediately sold which would be long-term if the new stock plan and challenging legal issues.
has been held for more than one year However, when properly structured and
––Payments to plan participants are taxed implemented, a management carve-
as ordinary income, not capital gains Primary disadvantages: out plan can go a long way toward
––Complex to structure and implement addressing a fundamental problem many
Alternative Three venture-backed companies face. <
Amend the terms of the company’s charter
to provide that a specified percentage of
the acquisition proceeds is paid to the FREQUENCY AND SIZE OF MANAGEMENT CARVE-OUT
holders of common stock (and, possibly, PLANS IN SALES OF PRIVATE COMPANIES
option holders) on a pari passu basis
with the liquidation preference payments 2016 2017 2018 2019 2020 SINCE 2007
to the holders of preferred stock.
Frequency 15% 9% 8% 10% 6% 14%
Primary advantages: Median size (as
percentage of 8% 9% 10% 11% 13% 10%
––Does not force the buyer to pay a portion acquisition price)
of the acquisition price in cash
Source: SRS Acquiom’s MarketStandard database (based on more than 2,400 private company acquisitions in which
it served as shareholder representative)Cross-Border Operations? Transfer Pricing Required
15 EARLY-STAGE COMPANIES IGNORE COMPLIANCE AT THEIR OWN RISK
E arly-stage companies are expanding
internationally faster than ever.
Thanks to the Internet, nascent companies,
WHY SHOULD ONE CARE?
The practical answer is that transfer
of Section 482 must be substantially
completed before the company’s tax
return for that taxable year is filed.
be they SAAS/cloud computing companies, pricing–related obligations are an
sellers of goods or services, marketplace easy compliance item to address when Contemporaneous transfer pricing
platforms, biotech enterprises or any expanding into cross-border business, documentation, which is based on a
other kind of business, are peddling but they can raise problematic issues if functional analysis and comparable
their wares across borders earlier and they are not addressed, and this omission transactions or industries (with similar
earlier after their launch. With business can, in itself, result in significant issues functions identified), establishes a range
growth and cross-border expansion come with US and foreign tax authorities. of compensation that the service provider
tax and financial obligations, including can earn (or that the service recipient
For example, if investors or acquirors should pay). Generally speaking, so long
multi-jurisdictional compliance with
discover during diligence that a company’s as the compensation equals or exceeds
US and foreign transfer pricing rules.
compliance with easy items is lacking, the lower quartile of applicable properly
these parties may wonder “what else computed compensation, then a tax
WHAT IS TRANSFER PRICING? hasn’t been done right?” and become authority should not impose penalties,
The phrase “transfer pricing” refers to concerned about the related exposure although this is not a hard-and-fast rule.
the pricing of intercompany transactions. the company faces. Such discoveries
Section 482 of the Internal Revenue Code can create trust issues when young Companies should devote proper attention
requires that the documentation and companies can least afford them. to determining the compensation range for
pricing of cross-border intercompany the service provider because valuation is
relationships and transactions be in WHAT IS REQUIRED? amorphous, with inherent room for error
accordance with the “arm’s-length” or negotiation. Relying on what someone
standard, to clearly reflect income for US Compliance is typically addressed “did at their last company” usually isn’t a
federal income tax purposes. The “arm’s- through a combination of intercompany reliable indicator of allowable pricing. As
length” standard has been the hallmark agreements and contemporaneous a practical matter, if a US parent company
for establishing intercompany pricing transfer pricing documentation. has a foreign subsidiary (which is not
in the United States for decades and has an entrepreneur or owner of intellectual
Ideally, all cross-border transactions
also become the international standard property rights) with operating losses, this
between controlled parties should
and accepted norm for establishing is a red flag that may draw scrutiny, audit
be identified and documented with
intercompany pricing. and adjustments in many jurisdictions.
an intercompany agreement that
proactively defines, where applicable:
WHEN DO TRANSFER PRICING WHAT SHOULD ONE DO?
REQUIREMENTS APPLY? ––the sales model for intercompany
transactions (such as a limited risk Although strict compliance with US
Transfer pricing obligations arise when transfer pricing rules may be challenging in
distributor or sales representative, which
parties owned or controlled directly or some circumstances, companies should at
have real differences in taxation); and/or
indirectly by the same interests (such as the very least achieve material compliance.
parent/subsidiary, brother/sister, parent/ ––the services provided, which are At a minimum, companies should put
branch or other controlled participant highly dependent on the organization’s in place intercompany agreements that
relationships) engage in cross-border legal structure and fall into different include a benchmark profit margin or
transactions with each other (including categories—for example, G&A services pricing methodology that is developed in
management services, G&A support are typically parent-to-subsidiary, conjunction with an economist or transfer
services, distributors, manufacturers, while R&D and manufacturing services pricing service provider and falls within
R&D, financing, technical support services are typically subsidiary-to-parent. an acceptable range of pricing (with
and similar relationships). internal documentation showing the cost
Intercompany agreements serve as
Early-stage companies are often unaware allocation and pricing used). Material
company policies and procedures
of their transfer pricing obligations. Even if compliance that shows results inside this
relating to cost allocation, invoicing and
they are aware, they often believe that the range and reflects thoughtful consideration
payment, and similar terms. In particular,
rules don’t apply to them because they have of intercompany relationships often
intercompany agreements state the
no revenue or operate at a loss, or because carries the day with tax authorities,
compensation to the service provider,
of other misconceptions. The reality is investors, buyers, auditors and the like.
which is the focus of both the arm’s-length
that if there is a cross-border transaction
standard for transfer pricing and a required Bottom line, companies should be
between commonly controlled companies
element of the Section 482 documentation thoughtful about their compliance
(or branches), then US and foreign transfer
requirement. This documentation and obligations rather than ignore them. <
pricing rules apply (and there is no
the other regulatory requirements
materiality threshold under Section 482).SEC Rule Amendments Expand the Pre-IPO Financing Toolkit
16 RECENT CHANGES BROADEN EXEMPTIONS AND FACILITATE INVESTOR COMMUNICATIONS
S tartup companies routinely rely on
exemptions from the registration
requirements of the Securities Act of
offerings. Offerings under both Tier 1
and Tier 2 of Regulation A are subject to
basic disclosure and financial statement
INVESTOR COMMUNICATIONS
Effective in March 2021, the SEC adopted
1933 to complete private placements requirements, require SEC filing and two rules that allow companies to engage
of securities. Over the past decade, review, and permit investor interest to in certain investor communications.
the JOBS Act and subsequent SEC be solicited through the use of written Rule 148 permits specified communications
rule amendments have created new “test-the-waters” materials filed with in connection with “demo day” meetings.
exemptions and expanded others. the SEC. In addition, Tier 2 offerings A demo day meeting is a meeting in which
Recent SEC rule changes have further are subject to limits on the amount of more than one company participates and
expanded the pre-IPO financing toolkit. securities that may be sold to unaccredited that is sponsored by an institution of
investors and require audited financial higher education, state/local government,
REGULATION D statements and ongoing public reporting. nonprofit organization, angel investor
Tier 1 offerings may raise up to $20 group, incubator or accelerator. Permitted
Regulation D prescribes general
million, including no more than $6 information is limited to a notification
requirements and exempts financings
million offered by selling stockholders, that the company is offering or planning
under two separate rules. Under Rule
in a 12-month period. Effective in March to offer securities, the type and amount of
506, placements may be of any size,
2021, the SEC increased the maximum securities being offered, the intended use
an unlimited number of “accredited
offering amounts in any 12-month period of proceeds, and the unsubscribed amount
investors” and up to 35 investors who do
for Tier 2 offerings from $50 million of the offering. Sponsors are not permitted
not qualify as accredited may participate,
to $75 million for company issuances to provide investment advice to attendees,
specified information must be supplied to
and from $15 million to $22.5 million engage in investment negotiations,
unaccredited investors, and unaccredited
for secondary sales. These changes charge attendance fees (other than
investors must be financially sophisticated.
may expand the universe of companies reasonable administrative fees) or receive
In addition, Rule 506(c) permits general
who find Regulation A appealing— finder’s fees or similar compensation.
solicitation and advertising, while Rule
506(b) does not. By contrast, Rule 504 particularly those that wish to become Under Rule 241, companies (and their
placements may include an unlimited publicly traded without undertaking a authorized representatives) may engage in
number of investors (accredited or conventional IPO or merging with a SPAC. specified written or oral “test-the-waters”
unaccredited) and are not subject to any communications with prospective investors
specific disclosure requirements, but are REGULATION CROWDFUNDING to determine interest in a contemplated
limited in offering size and may not include offering of securities exempt from
Regulation Crowdfunding permits
general solicitation and advertising. registration, provided that the company
private companies to use the Internet
has not determined the exemption on
Private companies generally find that to seek small investments from a large
which it intends to rely, no money or other
Regulation D provides the most useful and number of investors without registration.
consideration is solicited or accepted, and
practical exemptions from registration. The exemption limits the amount an
no offering commitment is made. <
Two recent rule changes should make investor may invest in crowdfunded
Regulation D even more helpful: offerings within a 12-month period,
requires all sales to be made through a
––Effective in December 2020, the SEC registered broker-dealer or a “funding PREVALENCE OF EXEMPTIONS
amended the definition of accredited
portal,” imposes disclosure and According to the SEC, during the period
investor to add new categories of natural
financial statement requirements, and July 1, 2019, through June 30, 2020:
persons based on professional credentials
requires annual SEC reporting. ––Regulation D: $1.4 trillion was raised
or financial sophistication and to add
new categories of entities, including a with a median offering size of $1.8
To date, Regulation Crowdfunding has
million under Rule 506(b), $69 billion
“catch-all” category for any entity owning not been widely used. Effective in March was raised with a median offering size
in excess of $5 million in investments. 2021, the SEC increased the maximum of $900,000 under Rule 506(c), and $171
amount of securities that a company million was raised with a median offering
––Effective in March 2021, the SEC may publicly offer and sell within any size of $100,000 under Rule 504.
increased the maximum offering size
under Rule 504 from $5 million to
12-month period from $1.07 million to ––Regulation A: $1.3 billion was raised with
$5 million, eliminated investment limits a median offering size of $2.1 million.
$10 million.
for accredited investors and loosened
––Regulation Crowdfunding: $88
investment limits for unaccredited million was raised with a median
REGULATION A
investors. These amendments should offering size of $100,000.
Regulation A provides an exemption make Regulation Crowdfunding
from registration for small public attractive to more companies.17 Trends in VC-Backed Company M&A Deal Terms
W e reviewed all merger transactions between 2016 and 2020 involving VC-backed targets (as reported in PitchBook for 2020, in
Dow Jones VentureSource or Pitchbook for 2019, and in Dow Jones VentureSource 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 2016 2017 2018 2019 2020
Sample Size 19 18 37 20 25
Cash 53% 56% 84% 60% 60%
Stock 0% 0% 3% 0% 8%
Cash and Stock 47% 44% 13% 40% 32%
Deals with Earnout 2016 2017 2018 2019 2020
With Earnout 37% 22% 32% 40% 28%
Without Earnout 63% 78% 68% 60% 72%
Deals with Indemnification 2016 2017 2018 2019 2020
With Indemnification
By Target’s Shareholders 100%2 94% 3 84% 80% 88%
By Buyer 37% 61% 39% 45% 32%
Deals with Representation and Warranty Insurance 2016 2017 2018 2019 2020
With Representation and Warranty Insurance Not Tracked Not Tracked 41% 25% 68%
Survival of Representations and Warranties 4
2016 2017 2018 2019 2020
Shortest 12 Mos. 9 Mos. 12 Mos. 12 Mos. 12 Mos.
Longest 18 Mos. 24 Mos. 24 Mos. 24 Mos. 18 Mos.
Most Frequent 18 Mos. 12 Mos. 18 Mos. 18 Mos. 12 Mos.
Caps on Indemnification Obligations 2016 2017 2018 2019 2020
With Cap 100% 100% 100% 100% 100%
Limited to Escrow 83% 94%6 79% 86% 81%
Limited to Purchase Price 0% 0% 0% 0% 0%
Exceptions to Limits 5 95% 94% 100% 100% 95%
Without Cap 0% 0% 0% 0% 0%
Escrows 2016 2017 2018 2019 2020
With Escrow 89% 100% 90%7 94% 90%
% of Deal Value
Lowest 8 5% 4% 3% 10% 8%
Highest 15% 13% 15% 13% 15%
Most Frequent 10% 5% 10% 12% 15%
Length of Time9
Shortest 12 Mos. 9 Mos. 12 Mos. 12 Mos. 12 Mos.
Longest 24 Mos. 24 Mos. 36 Mos. 36 Mos. 24 Mos.
Most Frequent 18 Mos. 12 & 18 Mos. (tie) 18 Mos. 12 Mos. 12 Mos.
Exclusive Remedy 88% 71% 72% 64% 68%
Exceptions to Escrow Limit Where Escrow Was 93% 92% 100% 100% 92%
Exclusive Remedy5
Baskets for Indemnification 2016 2017 2018 2019 2020
Deductible 10
47% 63% 47% 56% 52%
Threshold10 53% 37% 53% 44% 29%
MAE Closing Condition 2016 2017 2018 2019 2020
Condition in Favor of Buyer 100% 94% 100% 100% 100%
Condition in Favor of Target 39% 22% 12% 35% 24%
Exceptions to MAE 2016 2017 2018 2019 2020
With Exception 11
100% 100% 97% 12
100% 100%
1
For certain transactions, certain deal terms have been redacted from the publicly available documentation and are not 6
Includes two transactions where the limit was below the escrow amount.
reflected in the data compiled below. 7
One transaction not including an escrow at closing did require funding of escrow with proceeds of earnout payments.
2
Includes one transaction where the only representations that survive for purposes of indemnification are certain 8
Excludes transactions which also specifically referred to representation and warranty insurance as recourse
“fundamental” representations and representations concerning material contracts and intellectual property. for the buyer.
3
Includes one transaction where the only representations that survive for purposes of indemnification are those 9
Length of time does not include transactions where such time period cannot be ascertained from publicly available
concerning capitalization, financial statements and undisclosed liabilities, but excludes one transaction where documentation.
indemnification was provided for breaches of covenants prior to the closing but representations did not survive for 10
A “hybrid” approach with both a deductible and a threshold was used in another 10% of these transactions in 2020.
purposes of indemnification. 11
Generally, exceptions were for general economic and industry conditions.
4
Measured for representations and warranties generally; specified representations and warranties may survive longer. 12
The only transaction not including such exceptions provided for a closing on the same day the definitive agreement
5
Generally, exceptions were for fraud, willful misrepresentation and certain “fundamental” representations commonly
was signed.
including capitalization, authority and validity. In a limited number of transactions, exceptions also
included intellectual property representations.You can also read
