BANGALORE/SAN FRANCISCO (Reuters) – In the months since office-sharing startup WeWork’s botched public debut, mid- and late-stage investors in big start-ups have been pushing for more safeguards in case their firms fail to go public or sell shares at a lower valuation than pre-IPO financing rounds.
Fundraising terms are rarely made public, but more than a dozen Silicon Valley-based lawyers, entrepreneurs and venture-capital investors told Reuters that since WeWork’s canceled public offering and other ill-fated IPOs, investors have been securing protections of their original investments in “unicorns” – private companies valued at $1 billion or more.
Tougher terms are the price to pay for ensuring late-stage funding and sustaining the pipeline of initial public offerings, but also can be detrimental for founders, employees and early-stage investors, which in turn could make M&A deals challenging.
A quarterly survey by law firm Fenwick & West, which tracks deal terms of startup clients, showed a sharp rise in those with senior liquidation preferences for later stage funding rounds in the third quarter, the time when WeWork’s IPO plan unraveled. (tmsnrt.rs/2QPhdMZ)
Safeguards include a higher minimum price on shares in an IPO, “ratchets” that give investors more shares if the shares are priced below what they paid, guarantees of a certain return on investments, and rights to block the IPO.