Milestones or stumbling blocks?
Embarking on a quest for a second round of venture financing in late December, Russ Garcia, an Irvine, Calif., entrepreneur, agonized over an offer. The venture fund would fork out the money if his startup, which makes global-positioning satellite chipsets, met certain goals. The pricing was on a sliding scale ? upward if the goals were met, downward if they weren't.
Fearing that the terms were too stringent, Garcia rejected that first offer. But when u-Nav Microelectronics Corp. finally lined up alternative financing in August, it too, had a milestone structure. It was the only option, Garcia concluded.
"If you can have all the money upfront, obviously that would be preferable because you'd have a lot more flexibility that way," Garcia says. "But if you're looking for funding right now, it's kind of a way of life."
Across the parched early-stage financing landscape, investors are rationing out capital to starving companies in measured doses. Some venture firms hedge their bets by structuring financing terms around performance milestones to mitigate the risks for the investors. But the milestones also can prove to be nasty stumbling blocks for startups when carelessly designed.
"There's such a small base of early-stage funding so it's hard to define a trend, but I do see it more and more often," says Edward Reilly, a partner with Morgan, Lewis & Bockius' New York office. "I think people are considering doing it more frequently."
This certainly wasn't the approach three years ago, when venture capitalists virtually raced each other to a financing event. When the heady days ended, venture capitalists both reduced their investments and imposed more punitive deal terms. Some reso ...