• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar

StrictlyVC, LLC

Six months ahead.

  • Home
  • Newsletter
  • Advertising
  • Events
  • Podcasts
  • About
    • About Connie
    • Mission
    • Code of Ethics
  • Contact

Pay to Play: How Investors Get Burned in a Downturn

burnt toastEarlier this year, the law firm Fenwick & West published a report analyzing the financing terms of 37 U.S.-based venture-backed companies that raised money at valuations of $1 billion or more in the 12-month period ending March 31.

The report’s headline-grabbing conclusion was that in all cases, the investors had received significant downside protection in case the companies’ value declines. (Called a liquidation preference, the companies’ later-stage investors basically received the right to get paid ahead of other investors, as well as the companies’ management teams and employees.)

The findings were a revelation, but they didn’t provide a complete picture of what could happen in a downturn. In fact, there’s a giant hitch the report did not touch on, and that’s pay-to-play provisions, which became routine during the dot com bust of 15 years ago and could well become commonplace again if things head south.

“VCs, especially people who’ve been in the business a long time, understand them,” says attorney Barry Kramer, who authored the Fenwick & West report and more recently wrote on Medium about pay-to-play provisions. “It’s part of their calculation. I’m not sure that a good chunk of newer investors, whether non-traditional or because they’re just younger or whatever, have this scenario in mind.”

They should.

More here.

Filed Under: Entrepreneurs, Firm Dynamics Tagged With: pay to play

Don’t Miss Out! 

Sign up today to receive a free daily email with everything you need to start your day. Plus, keep track of the companies and personalities that will shape the industry in the months and years to come. Let StrictlyVC be your very own venture capital concierge.

Sign Up →

 

Primary Sidebar

Sign Up!

Add your email below to receive a copy of our free daily StrictlyVC newsletter. (Please don't forget to confirm your email address by clicking on the link in the confirmation link we will send you!)

You can unsubscribe anytime. For more details, please review our Privacy Policy.

Thank you!

We have sent you an email. Please click on the link to confirm your subscription!

.

@StrictlyVC on Twitter

Tweets by StrictlyVC
  • Privacy Policy
  • Terms of Service
  • Advertising

StrictlyVC, LLC

© 2023 StrictlyVC, LLC. All rights reserved.