1. Down-rounds, Re-Pricings, and Recaps Increase — The current macroeconomic environment, coupled with record increases in valuations over the last several years, is creating an increase in down-rounds, re-pricings, and recapitalizations. The exponential rates of valuation increases seen over the last few years are gone and, particularly for capital-intensive companies that raised cash in 2021 or 2022 and/or companies that did not meet their projected development goals and growth rates over that period, companies and existing investors are bracing for down-rounds and, potentially, re-pricings of prior rounds. Recaps will come in many forms, but most will share a common theme: pay up or lose your rights. These deals generally include some version of a pay-to-play, whether through a traditional cramdown mechanic or a pull-up mechanic. Regardless of the structure, balancing investor expectations regarding ownership levels and upside payouts, while keeping management and other employees incentivized through cash and equity compensation, will be critical to ensure continued growth for companies.
  2. De-risking Investments — Investors are feeling the pain in their portfolios, and they are looking for possible ways to de-risk and increase return rates for new investments. Standard convertible preferred stock and pari passu series that have been the norm for the last decade are giving way to senior securities with accruing dividends, guaranteed multiple returns, and/or participation features. Some investors also are looking for the right to force a sale in shorter timeframes (i.e., 18-36 months), which can create misalignment of incentives among early and late-stage investors and/or management/common stockholders.
  3. A Focus on Governance and Management Accountability — Investors will be hyper-focused on their portfolio companies’ development and growth progress and ability to stay within the budget and business plan. Founders and management teams will have less freedom to make mistakes and investors may look for ways to hold the management team accountable, such as through enhanced governance and consent rights for investors and altering management compensation structures to include more performance-based compensation (cash and equity). Gone (for now) are the days of “total founder control” involving founder super-voting stock, voting proxies, and total Board control.
  4. Expanding Deal Timelines — Venture capital funds still have funds to invest, but they will take longer to approve an investment, in part because they are doing more due diligence – kicking the tires several times – and negotiating harder on terms. This means deal timelines are stretching. Companies looking to raise capital should make sure they have plenty of runway when planning the timing of their next capital raise, expect funding delays, and have a back-up plan for a short-term bridge (e.g., convertible notes). 
  5. Deal Sourcing Moving to New Markets — With new hubs for startups popping up throughout the U.S. and abroad since 2020, investors may look for deals in “secondary markets” with lower costs, including markets where fund managers have relocated over the past few years (such as Florida, Texas, Colorado, and Utah). On the other hand, some investors may pull back and focus on investing in their backyard in traditional markets so they can keep an eye on their investments and visit more often in-person, dropping by the office for lunch to check in on the business.
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Photo of Chinh H. Pham Chinh H. Pham

Chinh H. Pham is Co-Chair of the Emerging Technology Practice and is a registered patent attorney with experience in the strategic creation, implementation and protection of intellectual property rights for high technology and life science clients, including those in the areas of software,

Chinh H. Pham is Co-Chair of the Emerging Technology Practice and is a registered patent attorney with experience in the strategic creation, implementation and protection of intellectual property rights for high technology and life science clients, including those in the areas of software, artificial intelligence, virtual and augmented reality, blockchain, video gaming, nanotechnologies, medical devices, electro-mechanical devices, telecommunications, data mining, and electronic commerce.

Chinh advises clients, ranging from start-ups to public companies, on the creation, development, and management of patent portfolios, the acquisition and exploitation of intellectual property rights, and identification of risks through intellectual property related opinions. Chinh also counsels clients on IP due diligence through the evaluation of client and competitor portfolios.

In addition, Chinh assists startup clients with strategies for leveraging their IP portfolio for high-value commercial opportunities, facilitating introductions to funding sources, as well as identifying and establishing strategic alliances.

Chinh has been recognized as a “Technology Law Trailblazer” by The National Law Journal, acknowledged as one of the “Top Emerging Tech Lawyer” by TechCrunch, named a leading IP Strategist by IAM Strategy 300, and honored as an “Outstanding 50 Asian Americans in Business,” by the Asian American Business Development Center.

Photo of Emily Ladd-Kravitz Emily Ladd-Kravitz

Emily Ladd-Kravitz focuses her practice on complex corporate transactions and representation of private companies in all stages of their life cycle. She represents venture capital funds, private equity firms, other institutional investors and companies in connection with a wide variety of corporate and…

Emily Ladd-Kravitz focuses her practice on complex corporate transactions and representation of private companies in all stages of their life cycle. She represents venture capital funds, private equity firms, other institutional investors and companies in connection with a wide variety of corporate and transactional matters, including mergers and acquisitions, private placements, minority investments, venture capital financings and corporate governance matters. She also advises start-up and growth-stage companies in all industries, including technology, edtech, medical device, clean energy, sustainable solutions and life sciences.

Photo of Bradley A. Jacobson Bradley A. Jacobson

Bradley A. Jacobson advises hedge funds, venture capital funds, private equity funds and investment advisers, as well as public and private companies, in a wide variety of securities, corporate finance, and merger and acquisition transactions. He is experienced in structuring and negotiating public…

Bradley A. Jacobson advises hedge funds, venture capital funds, private equity funds and investment advisers, as well as public and private companies, in a wide variety of securities, corporate finance, and merger and acquisition transactions. He is experienced in structuring and negotiating public and private offerings (equity and debt, including early and late-stage venture capital transactions and PIPE transactions), mergers, and stock and asset acquisitions. Additionally, Brad advises public and private companies with respect to corporate governance issues, public disclosures and securities law compliance, including proxy statements, registration statements and periodic reports, as well as investors with respect to Section 13 and Section 16 issues.