Entrepreneurs Increasingly in Control, Suggests New Report Out of Wilson Sonsini


Entrepreneurs’ access to broader funding sources — including many former entrepreneurs –continues to pay off hugely when it comes to who controls their company.

So one could conclude from a newly released report on financing trends by the storied Silicon Valley law firm Wilson Sonsini Goodrich & Rosati. Based on the firm’s research, for example, up rounds were the norm last year (representing 69 percent of all financings), and preferred stock terms in 2012 were more founder-friendly than in prior years. Among evidence of how: senior liquidation preferences were used in 37 percent of all Series B and later deals in 2012, down from 47 percent in 2011 and 50 percent in 2010.

But that’s just the start of it. Another data point that suggests entrepreneurs remain firmly in the driver’s seat include the percentage of deals involving non-participating preferred stock, which is strongly preferred by founders and their employees; those deals hit 67 percent last year, up from 58 percent in 2011 and 49 percent in 2010.

Pre-money valuations have also been soaring, zooming from $7 million in 2008 to $10 million in late 2011 to, at times, $14 million last year – which is higher than at any other time in the last five years, observes Wilson Sonsini. (The median premoney valuation for the period 2008 through the end of 2012 is $7.4 million, says the firm.)

More, last year, entrepreneurs held on to so much ownership of their companies — at least, through their first equity financing round — that they dramatically altered the median founder-investor split for the five preceding years. Specifically, from 2008 through early 2011, founders tended to own 40 percent of their company, while investors tended to own an equal share of 40 percent. By 2011’s end, that split had hit 45/35 percent in founders’ favor. But by last fall, founders were retaining up to 55 percent at the time of their first equity investment, while investors were making do with 25 percent. (For “much” of 2012, WSGR says the split was an ever so slightly tame 50/30 percent split in favor of founder ownership.)

The report – which is worth reading in its entirely – takes a stab at what’s going on, speculating that entrepreneurs may be as well positioned as they are for a wide variety of reasons. Many may be spinning out of companies like Facebook and Google, for example, and given their own personal wealth don’t have to sign on to just any deal. Similarly, there may be more second-time founders with solid reputations putting together financings on their own terms. Not last, today’s founders seemingly have the support of more angels with entrepreneurial backgrounds.

Whatever the case, Wilson Sonsini concludes its findings by calling 2012 a “very founder-favorable time.” VCs who’ve seen a cycle or two might be inclined to call it something else.

Photo: Image courtesy of Shutterstock.

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