Trends in Legal Terms in Venture Financings In the San Francisco Bay Area Second Quarter 2002 Background We analyzed the terms of venture financings for 74 technology companies headquartered in the San Francisco Bay Area that reported raising money in the second quarter of 2002 This compares to 45 deals analyzed in the first quarter of 2002 We attribute this increase to our ability to obtain better information on transactions not to an overall increase in transaction volume Published reports from industry analysts indicate that Q2 venture deal volume appears generally flat with Q1 Financing Round The financings broke down according to the following rounds Series A 11 compared to 7 in Q1 Series B 32 compared to 36 in Q1 Series C 27 compared to 18 in Q1 Series D 15 compared to 29 in Q1 Series E and higher 15 compared to 10 in Q1 The increase in the percentage of Series A financings is a positive but the absolute numbers are too small to determine whether this is a trend Price Change Approximately 52 of the financings were down rounds compared to 57 in Q1 10 were flat with the previous round which is the same percentage as Q1 and 38 were up rounds compared with 33 in Q1 The up rounds tended to be concentrated in early financing rounds e g 67 of the Series B rounds were up rounds compared to 62 in Q1 and the downrounds tended to be concentrated in the later rounds e g 70 of the Series D rounds were downrounds compared to 85 in Q1 There was a modest increase in the percentage of up round financings Up rounds continued to be concentrated in earlier rounds and down rounds in later rounds Liquidation Preference The liquidation preference in 56 of the financings was senior to the previously outstanding liquidation preferences compared to 62 in Q1 Senior liquidation preferences were concentrated in later rounds with 38 of the Series B compared to 44 in Q1 55 of the Series C compared with 62 in Q1 69 of the Series D compared with 69 in Q1 and 91 of Series E and higher compared with 100 in Q1 providing for a senior liquidation preference Of the senior liquidation preferences 41 provided for a multiple preference compared to 58 in Q1 Of the multiple preferences 87 were between 1 5x and 2x compared to 66 in Q1 13 were 3x compared to 27 in Q1 and none were more than 3x compared to 7 in Q1 There was a modest reduction in the number of financings providing for senior liquidation preferences and a more pronounced reduction in the use of multiple liquidation preferences Participation in Liquidation Approximately 67 of the Q2 financings provided for participation compared to 56 in Q1 Of the financings that had participation 56 were not capped compared to 32 in Q1 It appears that investors are valuing the participation feature more than in Q1 This could be a natural corollary to the somewhat reduced emphasis on the preference aspect of the liquidation provision noted above Antidilution Provisions Of the financings 20 provided for ratchet antidilution compared to 29 in Q1 and 78 provided for weighted average antidilution compared to 69 in Q1 2 of the financings did not provide for any price based antidilution compared to 2 in Q1 Pay to Play Provisions 18 of the financings had pay to play provisions compared to 20 in Q1 50 of the pay to play provisions provided for conversion of non participating investors preferred stock into common stock compared to 56 in Q1 33 provided for conversion to shadow preferred stock compared to 22 in Q1 and the remainder provided for a variety of other adjustments Redemption 44 of the financings provided for mandatory redemption or redemption at the option of the venture capitalist compared to 36 in Q1 Corporate Reorganizations 11 of the financings involved a corporate reorganization compared to 20 in Q1 70 of these reorganizations involved a reverse split of the outstanding stock compared to 100 in Q1 and 30 provided for a conversion of senior securities into more junior securities compared to 67 in Q1 The reduction in corporate reorganizations may be an indication that a growing number of companies that were funded in the bubble era have already been recapitalized or have been sold or liquidated Conclusion It s still a very difficult financing environment with historically high use of senior and multiple liquidation preferences ratchet anti dilution and pay to play provisions Nevertheless Q2 does seem to indicate a slight softening in terms compared to Q1 and a slight improvement in the ratio of up rounds to down rounds One likely cause of this modest softening of terms may be that an increasing number of companies that were funded during the bubble era have either had their valuations and capital structure re set to market or have been liquidated or sold thereby reducing the need for some of the tougher terms more complicated financings To the extent that this is true it would be an indication that venture capitalists are working through their backlog of legacy company capitalization issues and may begin to be able to devote more time to building value and identifying new opportunities 2002 Fenwick West LLP 1283735 1