SINGAPORE Trends and Developments Contributed by: David He, Benjamin Teo, Kinnari Sahita and Binh Vong, Gunderson Dettmer Singapore LLP
optionally convertible into equity at maturity or upon certain events, such as an exit or a default. While these notes may offer added protection for investors because they rank senior to equity in priority of payout in the event of a dissolu - tion or downside sale, they are accounted for as liabilities, which may increase a company’s cost of borrowing and serve as a deterrent to further equity investment until they are converted or redeemed. Additionally, notes are often accom - panied by warrants exercisable at a discount or nominal value, which typically trigger anti- dilution protections and can result in significant dilution to existing shareholders. We continue to see a rise in funding rounds structured with both primary and secondary components. These rounds fulfil several purpos - es, including allowing new investors to purchase shares from earlier investors at a discount to the new round’s valuation, thereby achieving a more attractive blended entry valuation. Additionally, they provide liquidity for earlier investors while enabling the company to raise fresh funding at a primary valuation higher than it might other - wise attract. This approach can help existing investors avoid a significant markdown in their investment and reduce, or entirely circumvent, the effects of anti-dilution adjustments. Many of the more stringent pricing and down - side protections that we observed in 2023 have, fortunately, become less prevalent in 2024. In the absence of truly distressed situations, inves - tors have generally demonstrated restraint from demanding multiples and/or participation rights on liquidation preferences, imposing ratchet- based anti-dilution protections, or seeking for - ward-looking most favoured nation provisions. This reflects a recognition that future investors will almost certainly piggyback on such terms, potentially on a senior basis, negating any tem -
porary advantage enjoyed by the investors who introduced them. It also signals that, although investors remain cautious and selective in the deployment of new capital, once a decision has been made to finance a company, they are adopting a longer-term perspective rather than concentrating primarily on immediate protec - tions. We have continued to observe a number of pay-to-play insider-led rounds throughout 2024 as securing new funding on acceptable terms remains challenging. Existing investors – often those who joined in more recent rounds at higher valuations – are willing to continue bridging their companies, but expect to be rewarded for their participation. Pay-to-play structures typically penalise non-participants by implementing a complete recapitalisation of preference shares into ordinary shares, with non-participating investors facing the risk of reduced or eliminated liquidation preferences, anti-dilution protections, and other preferential rights. In some instances, non-participants in a pay-to-play round also face “cram down” on their existing economics within the company, resulting in significant dilution of their equity stake. Artificial Intelligence to the Rescue AI-focused start-ups attracted considerable investment in 2024; however, most of this capi - tal was directed toward companies operating in more mature venture markets such as the USA and Europe. Investors have become more dis - cerning in their evaluation of start-ups claiming to develop novel AI solutions, targeting businesses that can provide customers with products that deliver consistent and measurable improve - ments in productivity and efficiency, without incurring excessive costs by relying heavily on expensive computing resources. Gunderson Dettmer’s 2024 Venture Capital Report found
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