Expected Term Sheet Changes In A Down Market

Recently, there have been a number of prognostications that we’re in for a market down-turn on the near horizon. Mark Suster mentions it in one of his most recent posts Here’s Why a Booming Tech Market May Fool You into Thinking You’re Successful. Of course, when the market does turn down it won’t be anything like the dot com crash as there’s significantly less capital in the tech startup community, more startups are making real money (not pyramid schemes like before), and it’s much less expensive to get a tech company started (still expensive to scale).

Here are a few things we’ll start see changing with investor term sheets when the market sours:

  • Valuations will go down (super-fast growth stage startups will still command great valuations but pre-revenue and early stage valuations will take a big drop)
  • Participating preferred liquidity preferences will become more common (and they’ll be more aggressive e.g. 2x and 3x liquidity preferences)
  • Cumulative dividends will be more standard (again, downside protection becomes a big theme)
  • Anti-dilution provisions will be stronger and more punitive to doing down rounds in the future

Entrepreneurs will keep starting companies and investors will keep writing checks. Raising money will be more difficult and the terms won’t be as entrepreneur-friendly as now. I hope we don’t have to see a down market again soon but I do believe things are still cyclical and it’ll come back around.

What else? What are some other thoughts on expected term sheet changes in a down market?

One thought on “Expected Term Sheet Changes In A Down Market

  1. I don’t know what the stats are but I always feel like angel investing takes a dive in a down market. When people are making money and there’s exuberance, a F&F investor or casual angel is less likely to throw some money after a startup.

    Here in Boulder, we’ve seen many Techstars companies cobble together a 300-700k round of 25/50k checks from angel investors. That’s been really helpful in getting these businesses off the ground.

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