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Rufus King D'77
Partner, Business Practice Group, Testa, Hurwitz & Thibeault

Visit Date: October 14, 2002
Class Topic: Term Sheets

Center for Private Equity and Entrepreneurship: How have the issues concerning terms and conditions of venture financing changed historically?

King: From the time of the last significant downturn in the early 1990s until 2000, redemption terms were more and more frequently omitted. The time to liquidity was often so short (six months or less) that no one wanted to waste time working out legal terms covering the downside scenario. Obviously, that has changed dramatically. Now, firms are getting more obsessed with protecting themselves from downsides. The rise of multiple liquidation preferences (MLPs) and full-ratchet anti-dilution provisions are perfect examples of that.

Center for Private Equity and Entrepreneurship: Do you think that MLPs will eventually go the way of the dodo since they are excessively punitive?

King: In very high-risk situations, MLPs will continue to be used, particularly in later rounds of funding where there is a danger of throwing good money after bad.

Center for Private Equity and Entrepreneurship: Do you have any advice for entrepreneurs who are facing VCs who want them to agree to these sorts of terms?

King: Wring the emotion out of the situation. It's easy to take these things too personally. Founders in this situation should ask the VCs what, based on their previous experience, would be the motivation for management under such terms? If they say, "An IPO," founders can counter with the fact that a buyout/acquisition is more likely. Using this rational approach may produce a better conversation and perhaps better terms. But, of course, the best strategy is to get a better offer from another VC firm. VC money is still out there, it's just on the sidelines. So, it might be best for entrepreneurs to keep shopping.

Center for Private Equity and Entrepreneurship: VCs have been suing each other recently. Is this part of a new trend that you expect to see continue? Or does the bad VC market drive these situations?

King: The VC industry used to be so small that a firm's reputation as a "team player" was of huge value. You didn't see firms suing each other or entrepreneurs because that would jeopardize the firm's reputation. Now, the population of VC firms has gotten so large that reputation may be, to some, of less value than meeting financial return objectives.

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