We are pleased to present the results of our survey for the first half of the year 2018, 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.
As always, this survey was produced in collaboration with Fenwick & West LLP., one of the leading Silicon Valley law firms. Our cooperation with Fenwick & West in producing this survey enables us to also present an interesting comparison, using the same tools and terminology, between the terms commonly practiced in Israel and those commonly practiced in the Silicon Valley.
The growth in the volume of investments in high-tech in the first half of 2018, reported in other surveys, was bolstered by indicia of positive trends with respect to legal terms applied during this period, that were observed in our survey.
For the first time since 2014, the rate of financing in later rounds resumed significance, accounting for 25% of the rounds surveyed, alongside a third of the rounds surveyed which were early rounds. This indicates to us that the industry, for the first time since 2014, continues to support mature companies alongside investing in new ventures. This is a healthy result, by all accounts, for an industry that on one hand went through periods of pursuits for the quick exit and difficulty in raising funds for mature companies and on the other hand, went through times during which funding largely went to existing companies and less to new ventures.
Additionally, for the first time, the use of the senior liquidation preference dropped to 59%, the lowest rate we have observed since we began our survey in 2008. In contrast to Silicon Valley, where the rate is only 23%, this is still a high rate, but compared with the rates observed in previous years that reached 83% and for a majority of the time hovered around 75%, this reflects a significant decline in the use of the senior liquidation preference, demonstrating an increasing growth of investor confidence.
As for the “cultural” differences that exist between Israel and Silicon Valley, it is interesting to note that in Silicon Valley, the rate of use of “participation rights” continued to decline, reaching only 10% in the first half of 2018! In Israel, there was a significant drop in the rate of use of this right in 2017, but the decline appears to have halted in the first half of 2018. With that said, as far as Israel is concerned – the rate of its use is three times that of Silicon Valley where according to our survey, the rate in Israel hovers around 31%.
It is further interesting to note that the use of full ratchet anti-dilution protection appears to have vanished from Silicon Valley, where according to our survey the rate of its use in Silicon Valley for the past several years has been 0%. In Israel, the full ratchet anti-dilution protection is still being applied, albeit at a very low rate of 3-4%, but it has yet to completely disappear, and perhaps the time for that has arrived.