THE ENTREPRENEURS REPORT Private Company Financing Trends

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1 THE ENTREPRENEURS REPORT Private Company Financing Trends From the WSGR Database: Financing Trends for Q and Rounds by Year - Equity Financings As we reported in Q1 2015, venture money is continuing to shift to a smaller number of large deals, which is causing surges in both the percentage of deals 80 high in Q2) and pre-money valuations. Notably, valuations of companies in laterround deals reached levels in Q2 not seen since before the Great Recession. Market conditions remain extremely founderfavorable, as noted in the other terms % of All Financings that are up rounds (which remained quite described below IN THIS ISSUE Financing Trends for Q Pages 1-6 Private Company Financing Deal Terms... Page 4 Bridge Loans... Page 5 Bridge Loans - Deal Terms... Page 6 Increasing Valuations of Late-Stage Deals... Page 7 and Rounds Q Q Flat is lower than the median for such deals, but similar to the figures for rounds rose to 8 of all Series B and and. The Q2 median pre-money later financings in Q Meanwhile, down rounds dwindled to a mere of such deals, and flat rounds remained relatively steady at 1. The percentage of down-round Series B and later financings remained lower than any period since Valuations The Q2 median pre-money valuation for closings of Series C and later rounds was $157.5 million, higher than any prior period in our records. Valuations The Q median pre-money valuation for closings of Seed and Series A deals backed by venture and corporate strategic investors dropped to $8.0 million, which $95M $82M $157M Q4 Series C and Later Q Series C and Later Q Series C and Later (Continued on page 2)

2 Median Pre-Money Valuations $ Millions Series A1 Q1 14 Q2 14 Series B Q3 14 Q4 14 Q1 15 Q2 15 Series C and Later valuation for closings of Series B deals page 7 for a more detailed analysis of this friendly market. These trends continued in climbed to $57.0 million, substantially surge in late-stage valuations., with cumulative dividends used in higher than in any quarter since The median pre-money valuation for Series just of all rounds and non-participating preferred increasing to 7 of all rounds. Amounts Raised C and later rounds was $157.5 million, In addition, the use of senior liquidation much higher than in any prior period in our The Q Series A and Series B rights declined, constituting only 3 of all records. See the article Increasing median amounts raised rose to $3.2 million rounds and 2 of up rounds. Please note Valuations of Late-Stage Deals on and $11.5 million, respectively; these totals that we are not reporting metrics for down are among the highest levels seen in the rounds in the first half of 2015, as so few past four years. For Series C and later down rounds occurred during the period rounds, the median amount raised in Q2 that any metrics are likely to be unreliable. $13M Q2 Median Amount Raised closings increased to $13.0 million, lower Higher than the figures for full-years,, and than in Q3 and Q4 but higher than Data on deal terms such as liquidation the figures for full-years,, and preferences, dividends, and others are set. forth in the table on page 4. To see how Series C and Later rounds Deal Terms Lower than in Q3 and Q4 the terms tracked in the table can be used in the context of a financing, we encourage you to draft a term sheet using our automated In our report on Q deal terms, we Term Sheet Generator, which is available in noted that increases in the use of non- the Entrepreneurial Services section of the cumulative dividends and non-participating firm s website at preferred suggested a strong, founder1 Seed rounds are included in this category, but we exclude Angel-backed Series A and seed rounds. 2

3 Median Amount Raised Equity Financings $ Millions Q1 14 Series A1 Q2 14 Series B Q3 14 Q4 14 Q1 15 Q2 15 Series C and Later WSGR Ranked No. 1 for Q Venture Financings Dow Jones VentureSource recently ranked Wilson Sonsini Goodrich & Rosati as the leading law firm for U.S. venture financings in the second quarter of Specifically, its legal rankings for Q issuer-side venture financing deals ranked WSGR ahead of all other firms by the total number of rounds of equity financing raised on behalf of clients. The firm is credited as legal advisor in 57 rounds of financing, while its nearest competitor advised on 44 rounds of financing. According to VentureSource, WSGR ranked first for Q issuer-side U.S. deals in the following industries: 1 Business and financial services Clean technology (tie) Communications and networking (tie) Consumer goods Healthcare Industrial goods and materials Information technology Medical devices and equipment Semiconductors (tie) Software Seed rounds are included in this category, but we exclude Angel-backed Series A and seed rounds. 3

4 Private Company Financing Deal Terms (WSGR Deals)1 All Rounds2 All Rounds2 All Rounds2 All Rounds2 4 Liquidation Preferences - Series B and Later Senior 37% % 6 Pari Passu with Other Preferred % 2 Junior Complex 1 Not Applicable Participating - Cap Participating - No Cap Non-participating Yes, Cumulative Yes, Non-cumulative None Weighted Average - Broad % Weighted Average - Narrow 1 1 Ratchet Other (Including Blend) None Applicable to This Financing 2 1 Applicable to Future Financings None Investor Option Mandatory None 77% % Participating vs. Non-participating Dividends Anti-dilution Provisions Pay to Play - Series B and Later Redemption We based this analysis on deals having an initial closing in the period to ensure that the data clearly reflects current trends. Please note that the numbers do not always add up to 10 due to rounding. Includes flat rounds and, unless otherwise indicated, Series A rounds. 3 Note that the All Rounds metrics include flat rounds and, in certain cases, Series A financings as well. Consequently, metrics in the All Rounds column may be outside the ranges bounded by the Rounds and Rounds columns, which will not include such transactions. 4 Due to the small number of down rounds in, we did not calculate the deal term percentages in this category

5 Maturities. The percentage of pre-series Bridge Loans A loans having maturities of less than For purposes of the The Q median amount raised in one year was in not as pre-series A bridge financings was $0.43 strong as the figure reported for Q1, but this report, our database million, substantially higher than the Q1 still higher than the figure of 1 for full- includes venture financing 2015 median, but nearly equal to the year. We continue to believe that $0.45 million median for full-year. this decline in the length of maturities for The equivalent figure for post-series A early-stage companies may represent a loans dropped from $1.75 million in Q1 shared belief among investors that suc to $1.09 million in Q cessful companies will find equity financing statistics and charts in transactions in which Wilson Sonsini Goodrich & Rosati represented either the company or one or more of the investors. relatively quickly. companies will remain strong for an ex- Interest rates. Annual interest rates of less tended period. than for pre-series A loans are the For post-series A loans, the percentage most common, with 77% of such loans in of these lower maturities also increased, falling into that category down from 2 in to in. Warrants. The decline in the use of war- from the figure we reported for Q1, but up However, there was also an increase in rants also suggests a founder-favorable from 7 for full-year. Rates below longer maturities, with loans of more than market, as well as a continuing desire to were the most popular for post-series 12 months rising from 37% to 5 (at the simplify transaction documentation. None A bridge loans as well; they were used in expense of maturities of exactly one year). of the pre-series A loans in car- 5 of such deals in, nearly the This may indicate that investors believe ried warrants, and only 2 of post-series same figure reported for Q1. that financing opportunities for later-stage A loans had them. Median Amount Raised Bridge Loans $ Millions Q1 14 Pre-Series A Bridge 5 Q2 14 Q3 14 Q4 14 Post-Series A Bridge Q1 15 Q2 15

6 Bridge Loans Deal Terms (WSGR Deals)1 PreSeries A PreSeries A PreSeries A PreSeries A PostSeries A PostSeries A PostSeries A PostSeries A Interest rate less than % Interest rate at Interest rate greater than Maturity less than 12 months Maturity at 12 months Maturity more than 12 months % 5 Debt is subordinated to other debt Loan includes warrants Warrant coverage less than Warrant coverage at Warrant coverage greater than Warrant coverage described as variable or "other" 2 1 Principal is convertible into equity % 97% Conversion rate subject to price cap Conversion to equity at discounted price Discount on conversion less than Discount on conversion at % Discount on conversion greater than Bridge Loans Conversion to equity at same price as other investors We based this analysis on deals having an initial closing in the period to ensure that the data clearly reflects current trends. Please note that the numbers do not always add up to 10 due to rounding. Of the pre-series A bridges that had warrants, 3 also had a discount on conversion into equity. Of the post-series A bridges with warrants, 2 also had a discount on conversion into equity. Of the post-series A bridges with warrants, also had a discount on conversion into equity. Due to the small number of deals with warrants in, we did not do the comparision. 3 This includes notes that provide for voluntary as well as automatic conversion. 4 Of the pre-series A bridges that had a discount on conversion into equity, also had warrants. Of the post-series A bridges that had a discount on conversion into equity, 1 also had warrants. Of the post-series A bridges that had a discount on conversion into equity, 1 also had warrants. Of the post-series A bridges that had a discount on conversion into equity, 1 also had warrants

7 Conversion. In the first half of 2015, Pre-Series A/Seed Convertible Bridge Loans (7/1/ to 6/30/2015) All Deals with Conversion Caps on Valuation ($M) Conversion Caps on Valuation Deals with Less than $1M Total Amount Raised ($M) pre-series A convertible note financings, a Median decline from the figure of 8 for full-year Average provisions for conversion to equity at a discounted price constituted 7 of all. For post-series A bridge financings, the same figure remained nearly constant, at 7 of loans for versus 7 for full-year. Conversion Caps Recently, we have had several clients ask us about price caps, or conversion caps, on pre-series A bridge loans. A that is more favorable to the investor. Over conversion cap fixes the maximum pre- the past year, about 6 of such bridge money valuation at which the investors loans have had a conversion cap. The will convert their debt into equity. There table above shows the metrics for these is often both a conversion cap and a caps. Note that these deals may also have discount on conversion, in which case the discounts on the purchase of equity or debt will automatically convert at the price carry warrants, or both. Increasing Valuations of Late-Stage Deals While many commentators have observed the median for Series C and later deals The below chart shows the percentage recently that valuations for late-stage increased from $82.0 million to $157.5 of WSGR late-stage deals for the past deals are increasing, the rise in median million between Q1 and Q quarters by date of initial closing with pre-money valuation for Series C and But our metrics are based on closings pre-money valuations above and below later deals from Q1 to Q is still in a quarter, and thus include deals that $100 million. It also shows the median striking. Medians can conceal trends had closings in prior quarters. As a result, valuation of such deals. Not only was there when the standard deviation for a data even that jump does not fully reflect the a substantially greater percentage of deals set is large, as is the case for late-stage significant increase in the number of deals in Q with valuations above $100 deals. The consequence is that medians with high valuations in Q million than during any other recent period, can occasionally jump substantially, as but the median valuation was even higher they have in our chart on page 2, where than in the chart on page 2. Pre-Money Valuations and Medians for Series C and Later Deals (by Quarter of Initial Closing) Q1 Q2 Q3 Q4 Q1 Deals with a Valuation of $100M or More Q2 Q3 Q4 Q1 Q2 Deals with a Valuation Below $100M 7 Q3 Q Q Q2 Median Pre-Money Valuation 0 Pre-Money Valuation in $ Millions Percentage of Total Series C and Later Deals 9

8 WSGR Methodology The //Flat analysis is based on WSGR deals having an initial closing in the period reported to ensure that the data clearly reflects current trends. The median pre-money valuation is calculated based on the pre-money valuation given at the time of the initial closing of the round. If the issuer has a closing in a subsequent quarter, the original pre-money valuation is used in the calculation of the median for that quarter as well. A substantial percentage of deals have multiple closings that span fiscal quarters. The median amount raised is calculated based on the aggregate amount raised in the reported quarter. 650 Page Mill Road, Palo Alto, California Phone Fax Austin Beijing Brussels Hong Kong Los Angeles New York Palo Alto San Diego San Francisco Seattle Shanghai Washington, DC Wilmington, DE For more information on the current venture capital climate, please contact any member of Wilson Sonsini Goodrich & Rosati s entrepreneurial services team. To learn more about WSGR s full suite of services for entrepreneurs and early-stage companies, please visit the Entrepreneurial Services section of wsgr.com. For more information about this report or if you wish to be included on the subscription list, please contact Eric Little (elittle@wsgr.com). There is no subscription fee. This communication is provided as a service to our clients and friends and is for informational purposes only. It is not intended to create an attorney-client relationship or constitute an advertisement, a solicitation, or professional advice as to any particular situation Wilson Sonsini Goodrich & Rosati, Professional Corporation. All rights reserved.