Investor Rights under US VC Investment Contracts -- How Liquidation Preference, Anti-dilution, and Pay-to-play affect investor payback

• Main Authors: Hsiu-hsian CHEN, 陳修賢
• Other Authors: 陳業寧
• Format: Others
• Language: en_US
• Published: 2005
• Online Access: http://ndltd.ncl.edu.tw/handle/13386447818950972632

碩士 === 國立臺灣大學 === 財務金融組 === 93 === Investment professionals adjust their playbook to go with the times. As the collapse of the technology bubble in early 2000’s has instigated changing prospects for the venture capital industry, it has profoundly altered the way how investors structure their deals. Already North American VCs have spent an inordinate amount of efforts in stemming potential losses in all possible avenues of profit or loss. This thesis aims to illustrate the new pattern of deal structure with a real case, a Silicon Valley-based networked storage system company that underwent multiple rounds of private financing in the last four years. Under scrutiny are two clauses related to investor downside protection that always appear in investment term sheets: liquidation preference and anti-dilution, plus another one protecting the firm that gets increasingly popular amongst VC investors lately: pay-to-play. Through modeling the economic outcomes of one Taiwanese venture capitalist’s investments into the firm’s last two rounds, the thesis demonstrate how different deal terms lead to different financial consequences for the investor. The calculation and analysis demonstrates marked quantitative differences regarding investor well-being between varying contract designs. On paper, the ones who get assertive claiming a more favorable deal seemingly attain the upper hand. Yet the readers also have to be aware of the intricate situation that an early-stage lead investor faces when working with the entrepreneurs and the existing investors to strike a deal of new funding. Only when optimal balance is reached between the three interests can the financing truly help the long-success of the venture. Even though it is very unusual for Taiwan-based VCs to play as a lead investor in US VC financing, Taiwanese venture capitalists still need to build the skill set and knowledge base to cope with the new patterns of US VC investment terms and conditions. Only by having a deal’s potential risks well understood and covered can one smartly recoup the investment upsides.