Fundraising hurdles and M&A slowdown with Becki DeGraw | Wilson Sonsini Startup Legal Basics
10 Sep 2024 (8 days ago)
Wilson Sonsini partner Becki DeGraw joins Jason
- The speaker is discussing startup trends with a lawyer from the law firm Wilson Sonsini.
- Silicon Valley Bank's collapse, the down market, and peak zero interest rates have significantly impacted the startup industry.
- Despite some improvements, startups are still grappling with the aftermath of these events in 2024.
Fundraising trends and investor expectations
- Fundraising has become more challenging for companies, especially compared to the unusually active fundraising environment of 2021.
- Investors have been advising companies to cut costs, reduce burn rates, and extend their runway in response to the unfavorable market conditions.
- While many companies followed this advice, it often resulted in slower growth, making them less attractive to investors seeking high-growth opportunities.
Breakeven points and penny warrants
- Companies that are not experiencing high growth are finding it difficult to secure up rounds of funding.
- To bridge the gap between company valuations and investor expectations, penny warrants are being used.
- Penny warrants allow investors to purchase additional shares at a significantly discounted price (e.g., one penny per share), effectively lowering the overall valuation while allowing the company to maintain a "flat round" on paper.
M&A slowdown and regulatory challenges
- The M&A market is currently experiencing a significant slowdown, characterized as a "chill".
- This slowdown is unusual, with deals often progressing to advanced stages with significant investments from both sides, only to fall apart due to renegotiations or sudden withdrawals.
- This lack of activity is particularly concerning for companies that are not ideal candidates for IPOs, as it limits their exit options and can lead to stagnation.
Proposals for M&A regulation reform
- Companies can be subject to multiple antitrust regimes, including international ones, depending on the jurisdictions involved.
- The potential cost of navigating regulatory hurdles, including legal fees, is factored into acquisition costs, potentially impacting the amount offered for a company.
- Break-up fees, paid by the buyer to the seller if a deal falls through due to regulatory issues, are becoming a more common topic of conversation in M&A discussions.
Compliance costs and cybersecurity for startups
- Regulations are increasing for tech companies, especially in fintech and digital health.
- Privacy regulations are becoming increasingly complex as they are now multi-jurisdictional, with different rules in California, the United States, the EU, and the UK.
- The cost of data storage has decreased, but the liability associated with storing data has increased, making it important for companies to carefully consider what data they need to store.
Legal strategies for startups and data policies
- Young employees may not understand the implications of their electronic communications, particularly in legal situations.
- It is recommended to avoid recording board meetings to encourage open conversation and reduce potential legal liabilities.
- When facing potential legal issues, it is advisable to seek legal counsel and have a conversation that is not recorded or transcribed.