Tom Burton knows more about how East Coast cleantech deals get done than most. As the founding lawyer of
PE Week Senior Writer Alexander Haislip caught up with Burton while the cleantech lawyer was traveling recently in California.
Q: What different terms and conditions are you seeing for cleantech companies?
VCs are seeking a suite of seniority rights and economic preference over the founders of the company. The core distinction here is that the business models are much more capital intensive, so there are needs to bring in syndicates or an expectation that the funding will be a much longer timeframe.
Q: A lot of cleantech companies have been smacked with down rounds. How do you advise your clients to deal with that?
We’re seeing dramatic decreases in valuationation at later rounds. You’ve got to walk into your deal at the Series A round stage understanding that might be an outcome. You have to make sure as an entrepreneur or investor that you’ve forged a real partnership. That helps dramatically if you have to do a down round later.
Q: Are there any particular contractual ways of dealing with it?
A: You can structure deals with option-true ups. It’s a structure based on the idea that the last round of options might have been at a valuation with unrealistic strike prices, so you want to set aside a pool of stock options for management that reflect the down round and keep management’s incentives aligned.
You kind of have this shared-pain model. Active participants in the company all bear pain in some way or another, and the ones who are not as involved with the company, such as the angels, end up experiencing more pain through dilution.
Q: You deal a lot with firms looking to structure funds. What kind of trends are you currently seeing?
We’re seeing more corporate venturing. The utilities have lots of cash and they’re getting more active in investments in cleantech.
I’d predict some fund formation, captive funds, being formed by utilities. They’re going to try to be consistent with what they’re doing: wind, solar, smart grid, battery storage and things like that.
Q: Any other predictions?
We’re going to see an uptick in investment.
This summer, there was a psychological shift in the marketplace. Companies said they’d never raise capital at the low a valuations they were seeing, but now things are a little better and they’ll be back out in the marketplace. They’re seeing a 30% uptick and it may not be as high as it was, but there’s something that clicks over and helps people have the confidence to raise money.