Cloudcade’s Harsh Series-A Term Sheet

Following up from last Thursday’s blog post about certain deal terms that entrepreneurs and employees at startups should become familiar with, our analysts found an interesting scenario with the October 2014 Series-A financing for Cloudcade, Inc. Founded in late 2013, Cloudcade is a free-to-play mobile games developer with a tablet-first approach towards deployment. Since inception, Cloudcade has assembled an all-star team with extensive experience in the gaming industry and an undying passion for creating the next generation of mobile entertainment. While its games will be optimized to be played on tablet devices, the company aims to bring gaming to the next level by releasing cross-platform on mobile, web and TV to allow users to play synchronously across any platform around the world.

Over the years, we’ve analyzed thousands of term sheets from venture capital financings in our Intelligence database. Most of the time, you tend to see investor friendly deal terms in later stage financings or in Healthcare/Biotech/Medical Device investments. With Cloudcade, however, this was their first round of institutional money in the booming “gaming” industry. IDG Ventures invested $1.5mm into the company in October 2014, with the following terms:

  • Round: Series A
  • Liq. Pref.: Not Applicable
  • Liq. Multiple: >1 – 2x
  • Stock Type: Participating Preferred
  • Capped Participation: No
  • Anti-Dilution: Full Ratchet
  • Redemption: Yes
  • Cumulative Dividends: No
  • Dividend Rate: 8%
  • Pay to Play: No
  • Reorganization: No
Notice the “Full Ratchet” Anti-Dilution provision? “Full Ratchet” (sometimes called “Ratchet”) Anti-dilution provisions reduce the effective per share purchase price of the investor’s shares purchased in a round to the actual, lower price set in a later offering or event (for example, a subsequent financing round or issuance of shares as consideration for a transaction) thereby raising the number of shares of Common Stock into which the investor’s Preferred Stock will convert. Full Ratchet is more favorable for the investors who receive it and can result in significant dilution for founders and other holders of Common Stock in the event of a Down Round. “Vanilla”, or company friendly, terms have been the norm for Silicon Valley early stage financings as of late. With IDG publicly  professing their appetite to invest in gaming companies, what could be the reason(s) for the harsh terms so early in the capital infusion process?

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s