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The Price of Venture Capital

October 31, 2003

Does it matter whether a start-up takes money from a large venture firm or a small venture firm? According to the just-released VentureOne Deal Terms Report, the answer is a resounding yes.

Using responses from executives at 269 companies that raised venture capital in 2002 and the first four months of 2003 paired with research from VentureOne, the report found that big venture firms – those with assets under management of $1 billion or more – take larger stakes in early rounds. In fact, investors in rounds led by large firms were likely to end up with 40 percent to 60 percent of a company more than half the time. In comparison, investors in deals led by small firms attained that kind of stake only 34 percent of the time.

Large investors also were more likely to enforce so-called "pay-to-play" provisions — clauses that force existing venture investors to return in later financings or risk losing their stake in a company.

However, the report suggests that while small firms may take smaller stakes and be less demanding of fellow investors, they are far more aggressive in getting protective provisions. Liquidation preferences, which are designed to guarantee investors a minimum return once a company is sold or taken public, were far more prevalent in rounds led by small firms than rounds led by larger venture capital firms.

The VentureOne Deal Terms Report is intended to be a resource for both venture capitalists and entrepreneurs who find themselves increasingly confronted with lengthy and complex term sheets. The report is available for $795 at: http://www.assetnews.com/products/reports/DealTerms.htm