Authors: Michael Grantmyre and Ryan Unruch

Financing terms intelligence

Financings which provide for a senior ranking liquidation preference

In 2024, in 26% of the rounds completed, the company issued investors a preferred share that ranked senior to all previously existing securities. Of those financings that qualified as down rounds in 2024, 50% included the issuance of a senior ranking security. This is consistent with the U.S. data for 2024, including from Fenwick and Wilson Sonsini, which reported that between 20% and 45% of U.S. financings included a senior liquidation preference (with a higher concentration of senior liquidation preferences in later stage financings). Of those financings completed in 2024, the highest concentration (29%) of senior ranking securities occurred in Series B financings.

Financings which provide for a multiple on liquidation preference

The chart below illustrates the percentage of financings included in the Deal Points Report where the securities issued included a multiple liquidation preference (e.g., 1.5x the amount invested). These results are consistent with our expectations, in that a 1x multiple on liquidation preferences remained the market standard for venture financings in 2024 (97%). For the five years covered by the Deal Points Report, 2024 represented the lowest incidence of multiple liquidation preferences.

Financings with participating preferred shares

The proportion of financings in the Deal Points Report which included participating preferred shares is outlined below. These results are consistent with our expectations, in that participating preferred shares are generally atypical of Canadian financings. The percentage of transactions that included a participation feature in 2024 (5.2%) was below the average for the four prior years covered by the Deal Points Report (7.1%). Of those financings that included a participating feature, 50% were down rounds and 50% were health /life sciences companies. The incidence of participating preferred shares in the deals covered by the Deal Points Report is consistent with the data reported in the 2024 U.S. deal studies, including Carta (5.1%) and Wilson Sonsini (7%).

Financings with cumulative vs. non-cumulative dividends

The proportion of financings in the Deal Points Report that included rights to cumulative dividends is highlighted below. In 2024, we saw a significant decrease in the number of financings that included a cumulative dividend (5.2%), a 63% decline in the proportion of deals with a cumulative dividend, as compared to 2023. These results are consistent with our expectations as cumulative dividends are generally uncommon in financing transactions, and are also consistent with data reported by Carta (5.9%) and Wilson Sonsini (4%) concerning the incidence of cumulative dividends in the U.S. Of those financings that included a cumulative dividend, the most common dividend rate (the mode) remained 8% — consistent with all prior years covered by the Deal Points Report. The highest concentration of cumulative dividends was in Series A and Series B financings (each representing about 1/3 of the 2024 financings with cumulative dividend feature), and surprisingly, only 17% of the deals that included a cumulative dividend were down rounds.

Financings which include rights to anti-dilution protection, types of anti-dilution protection

As in prior years, in 2024, broad-based weighted average anti-dilution protection continued to be the market standard in Canada (100% of all 2024 financings included in the Deal Points Report), regardless of whether the applicable financing was an up round, down round or flat round. This data is consistent with similar U.S. studies, where broad-based anti-dilution protection was included in 96% to 100% of all U.S. financings.

Financings with automatic conversion rights on an initial public offering

The graphic below shows the proportion of financings that included provisions for the automatic conversion of outstanding preferred shares into common shares in connection with a qualified initial public offering (QIPO) of the company, or a similar transaction. The data presented is consistent with our expectations — 100% of the financings completed in 2024 included an automatic conversion mechanism in connection with a QIPO.

Financings with automatic conversion rights on an initial public offering, average qualified initial public offerings values by series (in millions)

For financings in the Deal Points Report that included an automatic conversion mechanism, the chart below tracks the average minimum gross proceeds that a corporation must raise in connection with a QIPO to trigger the automatic conversion mechanism on a company’s preferred shares.

For 2024, the median QIPO threshold is more indicative of market practice, as outlined below.

Financings with redemption rights

The proportion of financings that included rights of redemption is shown below. This proportion is consistent with our expectations, in that redemption rights are generally uncommon in financing transactions. The rate of redemption rights in 2024 (4%) was below the average rate for 2020 to 2023. The data is also consistent with the financings reported in U.S. deal studies for 2024, including Wilson Sonsini (8%) and Cooley (4.3%).

Board representation

For financings included in the Deal Points Report, the chart below shows the average breakdown of board composition between common directors, preferred directors and independent directors, across all rounds of financings. For 2024, the average size of a company’s board across all financing rounds was 4.6 directors. In addition, 61% of those financings allocated a board seat to the then current CEO of the company.

Board representation, by series

For financings included in the Deal Points Report, this graph illustrates the breakdown of the average board composition (expressed as a percentage of the overall size of the board of directors), between common directors, preferred directors and independent directors, by series. These results are consistent with our expectations:

• The proportion of directors nominated by common shareholders, relative to the overall size of the board of directors, gradually decreased as the company raised subsequent rounds of financing.
• The proportion of directors nominated by preferred shareholders, relative to the overall size of the board of directors, gradually increased as the company raised subsequent rounds of financing.
• Based on the data analyzed, the common directors first started to represent less than a majority of the board upon completion of the Series B financing round, as more independent directors were introduced to the board (note that the founders, or some combination of them, are often granted the right to nominate a portion of these independent directors).

Reverse vesting

For financings included in the Deal Points Report in 2024, the chart below shows the breakdown of instances, by series, where founders were requested to reset all or a portion of the vesting on their existing founder shares, or put in place a new vesting arrangement if one was not already in place. It is important to note that the numbers below do not report on whether founders had vesting arrangements in place at the time of a financing; it only focuses on a requirement to impose new or additional vesting. As outlined below, it would be exceptionally rare for a founder to be required to revest any portion of their shares beyond an early-stage financing.

Approval thresholds for preferred shareholders in shareholders agreements, amendments

For financings included in this Deal Points Report, the composition of the “preferred majority” thresholds under the Voting Agreement, Right of First Refusal and Co-Sale Agreement, and the Investors’ Rights Agreement is illustrated below.

Specifically, these charts outline whether the definition of a preferred majority included a single threshold (e.g., at least a majority of the votes attached to the outstanding preferred shares) or multiple or layered thresholds (e.g., where a majority of the votes attached to the outstanding preferred shares must also include a majority of the votes attached to the Series C Preferred Shares). As the data below indicates, the overwhelming majority of financings included in the Deal Points Report, across all three main shareholder agreements, used a single threshold for the purpose of establishing the preferred majority definition. The preferred majority concept is used in a number of key provisions, including with respect to various shareholder approval matters, triggering drag-along rights and approving amendments and waivers to certain rights.

In 2024, although there was a small uptick in the number of financings that included a multiple threshold definition for the preferred majority, such multiple thresholds remained uncommon across deals reported, and were concentrated in later stage financings.

Voting agreements

Investors’ rights agreements

Right of first refusal and co-sale agreements

Information rights and inspection rights granted to preferred shareholders

Under the Investors’ Rights Agreement, certain preferred shareholders are provided with information rights (e.g., the right to receive annual and quarterly financial statements) and inspection rights (i.e., the right to examine the books and records of the company). Based on data, these information and inspection rights are typically only granted to a small subset of the preferred shareholders, specifically “major investors” or those preferred shareholders that hold a negotiated minimum threshold of the preferred shares (e.g., preferred shares representing at least 5% of fully diluted equity).

Pro-rata rights granted to preferred shareholders

Similarly, under the Investors’ Rights Agreement, certain shareholders are provided with pro-rata rights (often referred to as pre-emptive rights). Pro-rata rights give investors the right (but not the obligation) to participate in future financing rounds of a company, allowing such shareholders to maintain their existing pro-rata ownership (subject to certain standard exceptions). Consistent with the data on information rights, the vast majority of the financings included in the Deal Points Report in 2024 only granted these valuable pro-rata/pre-emptive rights to a small subset of the preferred shareholders (typically, limited only to those preferred shareholders that qualify as “major investors”). 

Approval thresholds for preferred shareholders in Voting Agreements, drag-along

Under the standard CVCA model financing agreements, the Voting Agreement includes a drag-along provision, where, if an agreed threshold of shareholders (and the board of directors) approves an exit transaction, then all other shareholders of the company are required to participate in the dragged transaction. Under the standard CVCA drag-along provision, the drag-along can be triggered by the approval of an agreed percentage of the preferred shares, a percentage of the common shares and the board. The charts below analyze each of these categories.

With respect to the preferred shares, nearly 90% of the Voting Agreements included in the financings covered by the Deal Points Report required the approval of a single threshold of the preferred shareholders (e.g., a majority of the votes attached to the outstanding preferred shares). Only 8.9% of the financings included a threshold that required something other than a single threshold, such as multiple thresholds (e.g., a majority of the votes attached to the outstanding preferred shares, which must include a majority of the votes attached to the outstanding Series B preferred shares).

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Acknowledgment

We gratefully acknowledge the help of our Osler Works – Transactional (OWT) team, including Natalie Munroe and Oren Kedmi whose contributions were critical in the completion of this report.

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