USA Law and Practice Contributed by: D. Scott Bennett, Nicholas A. Dorsey, Virginia M. Anderson and Ellen H. Park, Cravath, Swaine & Moore LLP
includes terms that may be severely punitive to non-participating investors by including other features such as forced conversions, pay-to- play mechanisms, super-priority liquidation pref - erences and special voting rights. Cramdowns may be a means for affecting a down round. In light of a subdued market for venture capi - tal investments, certain deal terms have also become increasingly investor-friendly. For exam - ple, liquidation preferences – ie, fixed payouts for investors upon the occurrence of a liquida - tion event like a sale or other exit – are typically set at 1x their investments in competitive market environments. In recent years, however, some investors have been able to obtain 2x or even 3x multiples. Terms granting investors participating liquidation preferences – ie, the right to share in additional proceeds after the fixed liquidation preference is returned – and cumulative divi - dends have also become more common. Bridge Financings Growth companies have also been utilising con - vertible debt and Simple Agreement for Future Equity (SAFE) instruments as forms of bridge financing to avoid down round valuations. These tools, which are traditionally used by companies to raise capital prior to their first priced equity round with outside investors, allow investors to put in capital that will convert into shares of the company at a discount to a subsequent priced equity round. Alternative Financing Solutions Some growth companies are utilising venture debt – ie, loans specifically designed for venture capital-backed growth companies – to fund their operations and defer a priced financing round and/or equity valuation. Venture debt is also fre - quently accompanied by an equity component, such as warrants in the company.
Asset-based lending provides growth compa - nies with the ability to borrow funds secured by their underlying assets. This option is particu - larly useful for companies that have significant assets (such as accounts receivable) on which to secure a loan, but may lack the cash flows typically required for a traditional loan. Other options include financing on the basis of annualised recurring revenue, royalty arrange - ments or registered IP, licensing and collabo - rations as well as other strategic partnerships coupled with a capital infusion from the external partner. Uptick in SPV Activity The use of SPVs is rising among investors. SPVs aggregate funds from multiple investors for a specific business purpose. In the venture capital community, SPVs allow investors to pool funds and participate in a funding round through a single investment vehicle. A growing number of venture capital firms themselves are also begin - ning to use SPVs as a means to pool funds from co-investors and invest in larger funding rounds or secondary transactions that would otherwise be outside of their investment parameters. 1.3 Key Industries As noted in 1.1 VC Market , the AI sector has continued to drive significant activity in the space. In 2024, venture capital funding in AI increased by 29%, accounting for roughly 46% of total deal value. The software sector in the USA, which includes software-based AI companies, saw the high - est numbers in terms of both deal number and combined deal value in 2024, with 5,560 deals and USD89 billion in proceeds in the sector. The commercial products and services sector post - ed the second-highest number of deals and the
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