Anatomy of a Venture Capital Transaction 207 Getting Ready for the Next Round Capital formation is an ongoing process. Upon the closing of the Series A round of venture capital financing, it is not too soon to begin thinking about position- ing the company and its capital structure for the Series B round. In the hey- day of 1999, the typical time between rounds could be as short as six to nine months. In 2002, the length of time between rounds slowed as long to as long as eighteen months or longer--or forever. In 2004, the length between rounds of venture capital stabilized at twelve to fifteen months. In 2010, the estimated time between rounds of financing was approximately twenty months. Key strategic questions to ask as you prepare for the next round of financ- ing include the following: · What milestones and performance objectives have been put into place as a condition for our next round of investment? · Will the next round be coming from our existing investors? If so, are those commitments firmly in place? If not, what steps have we taken to identify prospective Series B investors? · What happens if we need money between rounds? · What is our projected valuation and dilution of existing shareholders upon closing of the Series B round? · How will the rights of the Series A and Series B investors be balanced? How will special approvals be determined? How will investor-based seats be allocated? · What amendments to the charter and/or the Series A investment docu- ment will need to be made as a result of Series B financing? Many early-stage and rapid-growth companies do not adequately prepare for the next round and either fail to analyze these key strategic questions at all or do so too late in the process. The failure to be prepared can have a detrimen- tal effect on the capital structure of the company and the dilution of existing investors. 2002 and 2003: The "Down-Round" Dilemma In a perfect world, each round of financing would be at a higher valuation than the previous round, and existing investors would be rewarded for hav- ing had the foresight to invest in the company at its earliest stages. But when the Nasdaq fell from 5200 to 1600 and the levels of venture capital investment American Management Association www.amanet.org