Survey on Legal Terms of Venture Capital Transactions – For the Year 2017
We are pleased to present the results of our survey for the year 2017, which analyzes legal terms of venture capital (VC) investments in Israeli and “Israeli related” hi-tech companies, and comparing these terms to those common in the Silicon Valley, United States.
The annual results of 2017 indicate a slight increase in the rate of down rounds and flat rounds. This is in contrast to 2016 where we observed a record rate of 90% of up rounds. Majority of the down rounds were observed in D and later rounds.
What we are seeing is a minor increase in the rate of down rounds and flat rounds, not an indication of any trend. Overall the results of our survey reflected industry stability, where early rounds continued to constitute more than one-third of the rounds, no drastic changes in legal terms were observed, and the majority of the rounds were at a price increase.
The trend observed over the years regarding the declining use of participation rights of preferred shares appears to have continued in 2017, constituting less than a third of the rounds surveyed, and making it the lowest rate we have observed to date. Until 2012, participation rights were applied in two thirds and more of the surveyed rounds. This, too, suggests stabilization of the industry in Israel, as the industry in Israel continues to adopt industry-friendly terms from Silicon Valley, where the rate of use of participation rights hovered at only 15%.
At the same time, along with the declining use of the participation right, the industry in Israel continued to use accumulated interest on the preference amount in investments, in almost half the rounds surveyed (50% of the rounds surveyed in Israel compared with only 6% in Silicon Valley!). In addition, the Israeli industry continued to invest in preferred shares with senior liquidation preference as supposed to preference shares with liquidation preference pari passu with the previous financing round, at a rate of more than two-thirds of the rounds surveyed in Israel, compared to less than a third of those surveyed in Silicon Valley (73% in Israel compared with 27% in Silicon Valley). The industry in Israel has traditionally used both of these terms and in this regard is still not adjusting itself to the customary practice in Silicon Valley where investors are less protected with these terms vis-à-vis the entrepreneurs and the investors in the previous rounds. It appears that the industry in Silicon Valley
continues to focus on the success of the companies it invests in with less emphasis put on protective terms for events of failure.