00 Venture Capital Report

WILMER CUTLER PICKERING HALE AND DORR LLP Table of Contents

2 US Venture Capital Market Review and Outlook

6 Law Firm Rankings – Eastern US

7 Law Firm Rankings – Worldwide

8 US Regional Review and Outlook – California – Mid-Atlantic – New England – Tri-State

12 Selected WilmerHale Venture Capital Financings

14 European Review and Outlook

16 Law Firm Rankings – Europe

17 Trends in Venture Capital Financing Terms

18 Practical Advice for Living with Section 409A

20 Cheap Stock: New Twists on an Old Issue

21 VC Fund Formation Review and Outlook

22 M&A Deal Terms in Sales of VC-Backed Companies

24 Law Firm Rankings – Sales of VC-Backed Companies

US Venture Capital Market Review and Outlook

2005 Review US Venture Capital Financings – 1996 to 2005 In 2005, the amount and nature of venture # of deals $ in billions capital financing activity in the US 6,314 91.9 market was substantially similar to the levels seen in 2004 and the immediately preceding years. The changes in the 4,587 markets for liquidity events were more 48.5 3,266 appreciable, with a less robust IPO 2,558 34.7 2,384 2,212 2,155 2,242 2,220 market but an improved M&A market. 1,912 20.9 17.7 18.3 20.2 19.9 13.0 There were 2,220 reported venture capital 9.9 financings with $19.9 billion in proceeds in 2005, compared to 2,242 financings 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

with proceeds of $20.2 billion in 2004, Source: Dow Jones VentureOne and we expect the level of 2005 venture capital activity to see a boost once all transactions have been reported. While the 2005 metrics remain well below those of the 1999–2001 Internet bubble, in terms of both the number of financings and the amount invested, they are larger than the levels reached in any year during the 1995–1998 time period.

The median size of venture capital financings dipped from $7.0 million in 2004 to $6.6 million in 2005. The median US Venture Capital Financings by Industry – 1996 to 2005 financing size was once again higher for Biopharmaceuticals Medical Devices Other Life Sciences Software Communications & Networking Other IT life sciences companies ($8.0 million) than 3,652 for information technology companies Life Sciences ($7.0 million). This gap grew in 2005, Information Technology as the median life sciences financing 2,503

increased somewhat, while the median 1,936 IT financing was unchanged. 1,462 1,395 1,374 1,265 1,291 1,266 1,076 Valuations of venture-backed companies 829 623 619 increased once again from 2004 to 2005. 495 536 556 555 508 524 528 The median pre-money valuation for venture financings was $10.1 million 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

in 2003, $12.9 million in 2004 and $14.3 Source: Dow Jones VentureOne million in 2005. These increases reflect the gradual improvement in the last several consecutive year, while life sciences between 48% and 54% of the total number years in the markets for liquidity events, company valuations declined. of venture financings in each year. The and follow the laws of supply and demand, primary reasons for this decline include Seed and first-round venture capital as the amount of money available for the application of more rigorous financings represented 35% of the total investment by venture funds continues investment criteria by venture capitalists number of venture capital financings to increase. The $14.3 million median to new investment opportunities and and 21% of the total amount invested in pre-money valuation in 2005 represents a longer average time between an initial venture capital financings in 2005—almost the highest such figure for any year other venture funding and a liquidity event— exactly the same percentages as in 2004. than 1998–2001. a lag that increases the proportion While the proportion of seed and first- of later-stage companies in the mix Median pre-money valuations of life round financing activity has remained for venture financings. sciences companies and IT companies relatively consistent since 2001 (between converged at $15.0 million in 2005— 31% and 37%), these figures are down The breakdown of venture capital due to the fact that IT companies significantly from 1995–2000, when seed financings by industry sector has remained posted a solid increase for the third and first-round financings represented relatively consistent in recent years. US Venture Capital Market Review and Outlook

Financings of IT companies represented Median Size of US Venture Capital Financings – 1996 to 2005 57% of all venture capital financings in Life Sciences IT All Financings $ millions 2005, and have been between 54% and 10.0 9.7 60% of venture capital financings in each year since 1996. Life sciences company 8.0 7.7 7.5 financings constituted 24% of venture 7.0 7.0 7.2 7.0 7.0 7.0 6.6 6.5 6.5 6.6 capital financings in 2005. Other than 6.1 6.0 6.0 6.2 6.0 5.0 5.1 during the 1999–2001 Internet bubble, 4.5 4.6 4.0 4.0 when they dipped below 20%, financings 3.8 3.6 3.0 3.1 of life sciences companies have represented between 21% and 26% of venture capital financings in each of the last 10 years. As in recent years, the amount invested in life 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 sciences companies as a percentage of total Source: Dow Jones VentureOne venture investments in 2005 (31%) was higher than the percentage of life sciences financings, reflecting the greater financing needs of life sciences companies.

The leading locations for venture capital investing have changed little over the past decade. California led the country with 43% of all VC financings in 2005— a position it has held for at least 10 straight years (this data is not available for periods prior to 1996). Massachusetts has been the runner-up throughout this period, Median Pre-Money Valuation in US Venture Capital Financings – 1996 to 2005 and accounted for 11% of venture Life Sciences IT All Financings $ millions financings in 2005. Texas, New York and 30.0 Washington ranked third, fourth and fifth, 25.6 25.2 respectively, in both 2004 and 2005. 21.6 20.2 The IPO market for venture-backed 17.5 17.6 17.7 16.0 15.1 15.0 15.7 15.0 15.0 15.0 15.0 companies was not as strong in 2005 13.9 13.9 14.3 12.9 12.0 12.8 12.7 12.0 as it was in 2004. There were 41 IPOs 11.6 11.1 10.9 10.0 9.5 10.1 by venture-backed companies in 2005, compared to 67 in 2004. The 2005 figure significantly exceeds the average number of venture-backed IPOs (21) during the 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2001–2003 drought. However, the total Source: Dow Jones VentureOne of 41 venture-backed IPOs in 2005 was well below the average number of venture- equity funding to IPO inched down to to IPO indicates that venture-backed backed IPOs, not only during 1999–2000 5.6 years in 2005 from the 2003 and 2004 company IPOs from 1996–2000 produced (226 per year) but also in the 1996–1998 median of 5.7 years, which had been the significantly greater returns for investors period (an average of 135 per year). longest median time from funding to IPO than IPOs in the last several years, even The median amount raised in venture- in the preceding 10 years. The median though in recent years there has been a backed IPOs in 2005 ($48 million) was amount raised prior to IPO by venture- “raising of the bar” for IPO companies below both the 2004 figure ($50 million) backed companies going public in 2005 and IPO valuations are greater now and the median figure for the 2001–2004 was $52 million, which was below the than during the 1996–1998 period. 2004 figure but well above the figures in period ($60 million). The median The M&A market for venture-backed the mid- to late-1990s, when VC-backed pre-IPO valuation of venture-backed companies continued to improve in 2005. companies routinely completed IPOs IPO companies in 2005 ($167 million) There were 356 reported acquisitions after only one or two financing rounds. was also down from both 2004 ($224 of venture-backed companies in 2005, million) and the 2001–2004 period ($240 A comparison of median pre-IPO a decrease from the 407 reported in 2004, million). The median time from initial valuations to amounts raised prior but more than the 338 in 2003, and we US Venture Capital Market Review and Outlook

expect the total number of acquisitions in US Venture-Backed IPOs – 1996 to 2005

2005 to approach the 2004 number once all # of deals transactions have been reported.

In 2005, M&A transactions accounted 250

for 90% of the liquidity events for 216 venture-backed companies (IPOs 202 contributed the other 10%), marking the fifth consecutive year in which M&A 120 transactions represented 85% or more 68 of venture-backed liquidity events—in 67 41 sharp contrast to the 1996–2000 period. 22 20 22

The median acquisition price for venture- 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

backed companies in 2005 again increased Source: Dow Jones VentureOne significantly, growing from $25.0 million in 2003 to $39.3 million in 2004 to $47.5 million in 2005. The 2005 median acquisition price, while substantially lower than the $100.1 million median acquisition price in 2000, was higher than that of any year in the last 10 years other than the period 1999–2000.

The median time from initial funding to acquisition was 5.4 years in 2005—the highest figure in the last 10 years—and the Median Amount Raised Prior to IPO and Median Pre-IPO Valuation – 1996 to 2005 median amount raised prior to acquisition increased from $20 million in 2004 to $23 Median amount raised prior to IPO Median pre-IPO valuation $ millions million in 2005, indicating that acquirers are focusing on more mature companies. 363.3 314.1 281.2 2006 Outlook 229.5 232.6 223.8

We do not see any developments or trends 172.2 166.7 likely to result in a significant change 105.1 in the level of venture capital investments 78.7 73.2 60.2 in 2006. We expect that valuations of 46.9 47.8 49.0 52.0 22.4 31.3 venture-backed companies will continue 15.0 13.0 to increase in 2006, as a result of the same 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

factors that have driven up valuations over Source: Dow Jones VentureOne the past two years. However, the rate of increase (median pre-money valuations purchased for more than $500 million— developing technology that delivers in 2005 were 42% higher than in 2003) and only 15 were purchased for more than content to mobile consumers will likely is probably not sustainable. $250 million), rather than the billion- be a focus of increased investment interest. dollar deals that were relatively In addition, there will likely be a continued We expect to see a limited increase—if commonplace five to seven years ago. As blurring of the lines between IT and life any—in the average size of venture capital a result, venture capitalists must limit the sciences investments, as more investments financings, as well as continued downward amount they invest in companies—forcing are made in software, chips and pressure on the total amount raised by VC- companies to develop business plans components supporting medical and backed companies. Despite the requiring less funding than might have biotech applications. improvements in recent years in been available several years ago—in order The increased globalization of venture acquisition prices paid for venture-backed to earn attractive investment returns. companies, a very successful sale today capital activity is also expected to continue generally means an acquisition price of It is always difficult to predict which in 2006. We foresee more venture capital several hundred million dollars (in 2005 industry sectors will be “hot” in a given firms investing in overseas companies, only two venture-backed companies were year. However, we expect that companies sometimes with a local investment partner. US Venture Capital Market Review and Outlook

This trend is being driven by greater Acquisitions of US Venture-Backed Companies – 1996 to 2005 opportunities to invest in talented # of deals management teams or compelling technologies located abroad, as well 458 as increasingly accessible and attractive 402 407 380 356 end-user markets outside of the United 338 States. Another manifestation of this 304 253 globalization trend is the growing number 232 of investments in companies that have 199 management teams located in the United States and development or other operations located internationally. 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 We do not expect drastic changes in the IPO market in 2006. One positive sign is Source: Dow Jones VentureOne that we enter 2006 with some momentum, as the second half of 2005 produced twice as many venture-backed IPOs as the first half. However, the IPO “bar”—in terms of size and financial performance— remains relatively high. In addition, the regulatory environment—in particular, the expense involved in complying with SEC rules on internal control over financial reporting—is dissuading some companies from embarking on IPOs. We are cautiously optimistic that this situation Median Amount Raised Prior to Acquisition and Median Acquisition Price – 1996 to 2005 will become less of a disincentive for IPO Median amount raised prior to acquisition Median acquisition price $ millions candidates, as financial executives and auditors become more familiar with what 100.1 is still a new process and new regulatory regime, and as the SEC, the Public Company Accounting Oversight Board 55.2 and/or Congress ease the regulatory 47.5 burden for smaller companies. 40.0 39.3 33.3 31.1 26.0 25.0 23.0 19.0 19.0 20.2 There has been considerable speculation 14.7 16.5 11.3 10.4 about US venture-backed companies 5.5 5.5 6.9 going public on foreign stock exchanges 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 such as AIM (a small-cap exchange Source: Dow Jones VentureOne affiliated with the London Stock Exchange), or exchanges in Canada and Germany. However, offerings on such believe they will not hold steady or increase cycle of internal control audits, this exchanges typically do not result in modestly. M&A activity is generally impediment to acquisitions should significant liquidity opportunities for believed to have been dampened in the past be somewhat alleviated, leading to an < shareholders, and we therefore expect two years by the internal control increase in M&A transactions in 2006. documentation and audit process that the number of offshore IPOs by US January 2006 venture-backed companies to be limited. larger public companies had to report on for the first time in 2005, as companies M&A transactions should continue to be were concerned about the impact of the dominant liquidity vehicle for venture- introducing a new business enterprise backed companies in 2006. M&A into their internal control environment. valuations are not likely to continue Now that larger public companies—the to increase at the rate experienced in the most likely acquirers of venture-backed last two years, but there is little reason to companies—have completed their first Law Firm Rankings – Eastern US

Counsel to Companies Receiving VC Financing in 2005 – Eastern US

Wilmer Cutler Pickering Hale and Dorr LLP 57 Wilson Sonsini Goodrich & Rosati

Goodwin Procter LLP 32 Cooley Godward LLP

Cooley Godward LLP 20 Wilmer Cutler Pickering Hale and Dorr LLP

Mintz Levin Cohn Ferris Glovsky and Popeo, P.C. 20 DLA Piper Rudnick Gray Cary US LLP

DLA Piper Rudnick Gray Cary US LLP 16 Heller Ehrman LLP

Wilson Sonsini Goodrich & Rosati 16 Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP

Bingham McCutchen LLP 15 Fenwick & West LLP

Morris, Manning & Martin, LLP 15 Orrick, Herrington & Sutcliffe LLP

Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP 13 Pillsbury Winthrop Shaw Pittman LLP

Hutchison Law Group PLLC 10 Goodwin Procter LLP

Choate, Hall & Stewart LLP 9 Perkins Coie LLP

Morgan, Lewis & Bockius LLP 9 Latham & Watkins LLP

Morse, Barnes-Brown & Pendleton, P.C. 9 Mintz Levin Cohn Ferris Glovsky and Popeo, P.C.

Ropes & Gray LLP 9 Morrison & Foerster LLP

Edwards Angell Palmer & Dodge LLP 7 Bingham McCutchen LLP

McDermott Will & Emery 7 O’Melveny & Myers LLP

The above chart is based on companies located east of the Mississippi River that completed a seed, first, second, later stage or restart round of venture capital financing in 2005. Source: Dow Jones VentureOne

Counsel to VC-Backed Companies at Year-End 2005 – Eastern US

Wilmer Cutler Pickering Hale and Dorr LLP 147 Wilson Sonsini Goodrich & Rosati

Goodwin Procter LLP 66 Cooley Godward LLP

Morgan, Lewis & Bockius LLP 66 DLA Piper Rudnick Gray Cary US LLP

Cooley Godward LLP 62 Wilmer Cutler Pickering Hale and Dorr LLP

Mintz Levin Cohn Ferris Glovsky and Popeo, P.C. 56 Heller Ehrman LLP DLA Piper Rudnick Gray Cary US LLP 51 Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP 44 Fenwick & West LLP Morris, Manning & Martin, LLP 44 Pillsbury Winthrop Shaw Pittman LLP Bingham McCutchen LLP 40 Latham & Watkins LLP Wilson Sonsini Goodrich & Rosati 39 Morgan, Lewis & Bockius LLP Edwards Angell Palmer & Dodge LLP 37 Orrick, Herrington & Sutcliffe LLP Hutchison Law Group PLLC 34 Morrison & Foerster LLP Ropes & Gray LLP 33 Goodwin Procter LLP Foley Hoag LLP 28

McDermott Will & Emery 27 Mintz Levin Cohn Ferris Glovsky and Popeo, P.C.

Morse, Barnes-Brown & Pendleton, P.C. 27 Perkins Coie LLP O’Melveny & Myers LLP

The above chart is based on companies located east of the Mississippi River that have completed a seed, first, second, later stage or restart round of venture capital financing and were private and independent as of the end of 2005. Source: Dow Jones VentureOne Law Firm Rankings – Worldwide

Counsel to Companies Receiving VC Financing in 2005 – Worldwide

Wilson Sonsini Goodrich & Rosati 193

Cooley Godward LLP 126

Wilmer Cutler Pickering Hale and Dorr LLP 80

DLA Piper Rudnick Gray Cary US LLP 77

Heller Ehrman LLP 65

Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP 63

Fenwick & West LLP 48

Orrick, Herrington & Sutcliffe LLP 43

Pillsbury Winthrop Shaw Pittman LLP 39

Goodwin Procter LLP 33

Perkins Coie LLP 31

Latham & Watkins LLP 29

Mintz Levin Cohn Ferris Glovsky and Popeo, P.C. 25

Morrison & Foerster LLP 24

Bingham McCutchen LLP 20

O’Melveny & Myers LLP 20

The above chart is based on all companies contained in the VentureSource database (covering the United States, Europe and Israel) that completed a seed, first, second, later stage or restart round of venture capital financing in 2005. Source: Dow Jones VentureOne

Counsel to VC-Backed Companies at Year-End 2005 – Worldwide

Wilson Sonsini Goodrich & Rosati 480

Cooley Godward LLP 304

DLA Piper Rudnick Gray Cary US LLP 225

Wilmer Cutler Pickering Hale and Dorr LLP 209

Heller Ehrman LLP 193

Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP 151

Fenwick & West LLP 121

Pillsbury Winthrop Shaw Pittman LLP 111

Latham & Watkins LLP 94

Morgan, Lewis & Bockius LLP 85

Orrick, Herrington & Sutcliffe LLP 85

Morrison & Foerster LLP 77

Goodwin Procter LLP 69

Mintz Levin Cohn Ferris Glovsky and Popeo, P.C. 64

Perkins Coie LLP 63

O’Melveny & Myers LLP 59

The above chart is based on all companies contained in the VentureSource database (covering the United States, Europe and Israel) that have completed a seed, first, second, later stage or restart round of venture capital financing and were private and independent as of the end of 2005. Source: Dow Jones VentureOne US Regional Review and Outlook US Regional Review and Outlook

and $9.60 billion in 2004. Final 2005 1,987 Carolina, Delaware and the District data—after all transactions have been of Columbia, compared to 151 in 2004, 508 22.83 reported—are likely to show growth with $1.38 billion in proceeds in each year. 6.04

in deal volume from 2004 to 2005 and 1,117 1,173 Although the reported data suggests 2005 14.70 309 940 909 894 951 955 comparable proceeds across both years. 802 was a flat year in venture capital activity, 238 2.98 9.28 9.60 8.96 176 2.60 185 8.33 147 148 151 152 7.38 we expect that the region will show year- 125 5.86 1.54 1.38 1.38 Roughly four times the size of the next 4.07 1.32 1.02 over-year growth once all transactions 0.62 0.79 largest venture capital market in the United have been reported. States, California was responsible for 43% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

of all deals and 41% of all proceeds in the Source: Dow Jones VentureOne The region produced some notable deals Source: Dow Jones VentureOne country in 2005. Although 2005 activity during the year, such as information was well below the peak year of 2000— technology company TARGUSinfo’s $60 when California produced a staggering million financing. IT companies accounted 2,523 financings with $40.03 billion in for 52% of all financings in the region— proceeds—deal volume and proceeds have the same percentage as in 2004—and life largely returned to pre-bubble levels. sciences companies edged up from 28% to 30%. California’s venture capital market spans California Venture Capital Financing by Industry – 1996 to 2005 Mid-Atlantic Venture Capital Financing by Industry – 1996 to 2005

all industry sectors, with particular Biopharmaceuticals Medical Devices Other Life Sciences Software Communications & Networking Other IT Venture-backed companies in the mid- Biopharmaceuticals Medical Devices Other Life Sciences Software Communications & Networking Other IT strengths in technology, life sciences, Atlantic region bucked the national decline 1,555 consumer retail and media/entertainment. Life Sciences in IPO activity in 2005, but mirrored the Life Sciences IT companies dominated the market Information Technology national trend of fewer acquisitions. Information Technology again in 2005, accounting for 63% of 1,147 There were four IPOs by mid-Atlantic all financings in the state—down from VC-backed companies in 2005—the largest 279 760 68% in 2004. Life sciences companies 699 651 609 598 605 number since 2000—compared to two made up 20% of California’s deals— 587 170 513 in 2004. Three of the 2005 IPOs came the same percentage as in 2004. 129 96 105 305 from Maryland, including the nation’s 84 85 238 218 76 79 79 176 189 210 207 199 194 194 59 57 California spawned 14 IPOs by venture- largest VC-backed IPO of the year (Under 41 42 47 43 44 36 42 46 backed companies in 2005, down from Armour’s $123.5 million offering). 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 38 in 2004, as some IPO candidates opted The number of acquisitions of venture- for M&A liquidity on attractive terms. Source: Dow Jones VentureOne Source: Dow Jones VentureOne backed companies in the region fell Although the number of acquisitions from 35 in 2004 to 22 in 2005. The of VC-backed companies declined region’s largest deal of the year was from 161 in 2004 to 127 in 2005, the the acquisition of healthcare company state produced 10 of the 15 deals in the Lumenos for $185 million. country over $250 million, and the largest sale of the year (Pfizer’s acquisition For 2006, we expect that the of Angiosyn for $527 million). California Venture-Backed IPOs and Acquisitions – 1996 to 2005 concentration of companies that focus Mid-Atlantic Venture-Backed IPOs and Acquisitions – 1996 to 2005 on information technology, national We expect California to maintain its # of IPOs # of Acquisitions # of IPOs # of Acquisitions security, government contracting and venture capital leadership in 2006, 186 defense will produce a steady stream particularly in technology and life sciences. 173 161 of attractive emerging companies in With a heavy concentration of industry 149 150 the region. We also expect that the leaders, venture capitalists, scientific talent, 128 127 122 region—and particularly the Research entrepreneurs, service providers and other 95 91 Triangle area—will remain a leading 36 35 37 35 startup infrastructure, conditions are ripe 82 73 67 center of life sciences–related investment. 26 for further growth in California in 2006. 22 48 A significant part of that growth should 38 16 14 16 29 11 12 11 10 8 come from “global startups” that are 11 11 14 7 4 2 4 founded and financed in Silicon Valley, 1 1 1 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 but have major operations in Asia or other foreign jurisdictions. Source: Dow Jones VentureOne Source: Dow Jones VentureOne US Regional Review and Outlook US Regional Review and Outlook

California California Venture Capital Financings – 1996 to 2005 Mid-Atlantic Mid-Atlantic Venture Capital Financings – 1996 to 2005 California companies reported 955 # of deals $ in billions In 2005, there were 152 reported venture # of deals $ in billions financings, with $8.96 billion in 40.03 capital financings in the mid-Atlantic proceeds, in 2005, compared to 951 deals 2,523 region of Virginia, Maryland, North and $9.60 billion in 2004. Final 2005 1,987 Carolina, Delaware and the District data—after all transactions have been of Columbia, compared to 151 in 2004, 508 22.83 reported—are likely to show growth with $1.38 billion in proceeds in each year. 6.04 in deal volume from 2004 to 2005 and 1,117 1,173 Although the reported data suggests 2005 14.70 309 940 909 894 951 955 comparable proceeds across both years. 802 was a flat year in venture capital activity, 238 2.98 9.28 9.60 8.96 176 2.60 185 8.33 147 148 151 152 7.38 we expect that the region will show year- 125 5.86 1.54 1.38 1.38 Roughly four times the size of the next 4.07 1.32 1.02 over-year growth once all transactions 0.62 0.79 largest venture capital market in the United have been reported. States, California was responsible for 43% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 of all deals and 41% of all proceeds in the Source: Dow Jones VentureOne The region produced some notable deals Source: Dow Jones VentureOne country in 2005. Although 2005 activity during the year, such as information was well below the peak year of 2000— technology company TARGUSinfo’s $60 when California produced a staggering million financing. IT companies accounted 2,523 financings with $40.03 billion in for 52% of all financings in the region— proceeds—deal volume and proceeds have the same percentage as in 2004—and life largely returned to pre-bubble levels. sciences companies edged up from 28% to 30%. California’s venture capital market spans California Venture Capital Financing by Industry – 1996 to 2005 Mid-Atlantic Venture Capital Financing by Industry – 1996 to 2005 all industry sectors, with particular Biopharmaceuticals Medical Devices Other Life Sciences Software Communications & Networking Other IT Venture-backed companies in the mid- Biopharmaceuticals Medical Devices Other Life Sciences Software Communications & Networking Other IT strengths in technology, life sciences, Atlantic region bucked the national decline 1,555 consumer retail and media/entertainment. Life Sciences in IPO activity in 2005, but mirrored the Life Sciences IT companies dominated the market Information Technology national trend of fewer acquisitions. Information Technology again in 2005, accounting for 63% of 1,147 There were four IPOs by mid-Atlantic all financings in the state—down from VC-backed companies in 2005—the largest 279 760 68% in 2004. Life sciences companies 699 651 609 598 605 number since 2000—compared to two made up 20% of California’s deals— 587 170 513 in 2004. Three of the 2005 IPOs came the same percentage as in 2004. 129 96 105 305 from Maryland, including the nation’s 84 85 238 218 76 79 79 176 189 210 207 199 194 194 59 57 California spawned 14 IPOs by venture- largest VC-backed IPO of the year (Under 41 42 47 43 44 36 42 46 backed companies in 2005, down from Armour’s $123.5 million offering). 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 38 in 2004, as some IPO candidates opted The number of acquisitions of venture- for M&A liquidity on attractive terms. Source: Dow Jones VentureOne Source: Dow Jones VentureOne backed companies in the region fell Although the number of acquisitions from 35 in 2004 to 22 in 2005. The of VC-backed companies declined region’s largest deal of the year was from 161 in 2004 to 127 in 2005, the the acquisition of healthcare company state produced 10 of the 15 deals in the Lumenos for $185 million. country over $250 million, and the largest sale of the year (Pfizer’s acquisition For 2006, we expect that the of Angiosyn for $527 million). California Venture-Backed IPOs and Acquisitions – 1996 to 2005 concentration of companies that focus Mid-Atlantic Venture-Backed IPOs and Acquisitions – 1996 to 2005 on information technology, national We expect California to maintain its # of IPOs # of Acquisitions # of IPOs # of Acquisitions security, government contracting and venture capital leadership in 2006, 186 defense will produce a steady stream particularly in technology and life sciences. 173 161 of attractive emerging companies in With a heavy concentration of industry 149 150 the region. We also expect that the leaders, venture capitalists, scientific talent, 128 127 122 region—and particularly the Research entrepreneurs, service providers and other 95 91 Triangle area—will remain a leading 36 35 37 35 startup infrastructure, conditions are ripe 82 73 67 center of life sciences–related investment. 26 for further growth in California in 2006. 22 48 A significant part of that growth should 38 16 14 16 29 11 12 11 10 8 come from “global startups” that are 11 11 14 7 4 2 4 founded and financed in Silicon Valley, 1 1 1 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 but have major operations in Asia or other foreign jurisdictions. Source: Dow Jones VentureOne Source: Dow Jones VentureOne 10 US Regional Review and Outlook US Regional Review and Outlook

the technology and life sciences sectors. Source: Dow Jones VentureOne and one was in financial services. Source: Dow Jones VentureOne Acquisitions of venture-backed companies The number of acquisitions of venture- in New England increased from 56 in 2004 backed companies in the region increased to 64 in 2005—a figure exceeded only once from 45 in 2004 to 47 in 2005—a in the past decade (69 in 2000). The region total exceeded only once in the past 10 produced two sales over $200 million—the years (49 in 2001). The tri-state region acquisitions of Imagitas and TransForm accounted for five acquisitions of VC- Pharmaceuticals for $230 million each. New England Venture-Backed IPOs and Acquisitions – 1996 to 2005 backed companies for more than $250 Tri-State Venture-Backed IPOs and Acquisitions – 1996 to 2005 million each—three in healthcare and For 2006, we expect New England—and # of IPOs # of Acquisitions # of IPOs # of Acquisitions two in information technology—the only Massachusetts in particular—to remain region outside of California to produce a hub of venture capital activity. The 69 64 any acquisitions of that size in 2005. region’s world-renowned universities 56 52 and research institutions should continue 49 48 We believe that the tri-state region’s 49 45 47 to produce technological innovations, strengths in the pharmaceuticals, 37 39 39 35 36 36 36 37 35 scientific discoveries, talented employees life sciences, financial services and 32 27 27 25 and entrepreneurs, all of which—coupled 22 information technology sectors— 20 19 16 with the area’s extensive network of venture combined with its large number of 14 10 capitalists and other service providers— 7 8 9 9 5 3 Fortune 500 companies—will provide 5 5 1 0 2 1 should maintain New England’s status as a favorable environment for VC-backed 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 one of the country’s most appealing startup companies in 2006. < environments for emerging companies. Source: Dow Jones VentureOne Source: Dow Jones VentureOne US Regional Review and Outlook US Regional Review and Outlook 11

New England New England Venture Capital Financings – 1996 to 2005 Tri-State Tri-State Venture Capital Financings – 1996 to 2005 New England companies reported 293 # of deals $ in billions The number of reported venture capital # of deals $ in billions 824 11.63 financings, with $2.79 billion in proceeds, financings in the tri-state region of New 757 in 2005 compared to 314 deals and $2.81 York, New Jersey and Pennsylvania 10.58 billion in 2004. Once all 2005 transactions 611 declined modestly, from 239 in 2004 have been reported, we expect that 474 to 207 in 2005, although we expect this gap 493 financing proceeds in 2005 will exceed to close once all 2005 transactions have 437 389 5.71 358 5.05 329 2004 proceeds and that the number of 2005 307 314 been reported. Total reported investment 4.73 281 293 3.78 deals will approximate 2004 deal volume. proceeds increased by 12%, from $1.99 228 248 241 239 3.02 3.03 2.81 2.79 208 207 2.28 billion to $2.22 billion. 143 1.99 2.17 1.99 2.22 While venture capital investment in the 1.49 1.55 1.80 1.09 region remains well below the bubble Venture capital activity in the region again 0.71 years of 1999–2001, the average number 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 exceeded the pre-boom years of 1996– 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 of New England financings over the last 1998, which produced an annual average Source: Dow Jones VentureOne Source: Dow Jones VentureOne four years (324 deals) closely parallels that of 193 financings raising $1.26 billion. of the 1996–1998 period (326 deals). IT companies continued to dominate New England continues to be a leading the tri-state region’s VC financing market, center of activity for technology and life with 52% of all deals in 2005—up from sciences companies—and the only region 49% in 2004. Life sciences companies to report increases in both IPOs and logged 27% of the region’s financings, acquisitions of VC-backed companies New England Venture Capital Financing by Industry – 1996 to 2005 compared to 26% in the prior year. Tri-State Venture Capital Financing by Industry – 1996 to 2005 in 2005. In 2005, information technology Biopharmaceuticals Medical Devices Other Life Sciences Software Communications & Networking Other IT Biopharmaceuticals Medical Devices Other Life Sciences Software Communications & Networking Other IT companies accounted for 60% of the Liquidity events in the tri-state region 497 region’s venture capital financings— largely echoed national trends in 2005. Life Sciences Life Sciences down from 64% in 2004—and life sciences Information Technology The number of venture-backed IPOs Information Technology 403 companies made up 25% of the year’s deals, 360 in the region dropped by half, from compared to 24% in 2004. 277 ten in 2004 to five in 2005, as attractive 237 The region produced eight venture- 218 220 valuations steered more companies to 234 197 201 179 177 backed IPOs in 2005, compared to seven 160 sales. Of the five IPOs in 2005, two were 125 124 in information technology (including 117 118 117 107 in 2004—all from Massachusetts in 90 98 99 88 92 93 80 84 82 74 73 79 65 55 65 56 61 63 56 both years. In contrast to 2004, when the nation’s second largest VC-backed 41 54 all seven New England IPOs were in life IPO of the year, DealerTrack’s $113.3 sciences, the eight IPOs in 2005 spanned 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 million offering), two were in life sciences, 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 the technology and life sciences sectors. Source: Dow Jones VentureOne and one was in financial services. Source: Dow Jones VentureOne Acquisitions of venture-backed companies The number of acquisitions of venture- in New England increased from 56 in 2004 backed companies in the region increased to 64 in 2005—a figure exceeded only once from 45 in 2004 to 47 in 2005—a in the past decade (69 in 2000). The region total exceeded only once in the past 10 produced two sales over $200 million—the years (49 in 2001). The tri-state region acquisitions of Imagitas and TransForm accounted for five acquisitions of VC- Pharmaceuticals for $230 million each. New England Venture-Backed IPOs and Acquisitions – 1996 to 2005 backed companies for more than $250 Tri-State Venture-Backed IPOs and Acquisitions – 1996 to 2005 million each—three in healthcare and For 2006, we expect New England—and # of IPOs # of Acquisitions # of IPOs # of Acquisitions two in information technology—the only Massachusetts in particular—to remain region outside of California to produce a hub of venture capital activity. The 69 64 any acquisitions of that size in 2005. region’s world-renowned universities 56 52 and research institutions should continue 49 48 We believe that the tri-state region’s 49 45 47 to produce technological innovations, strengths in the pharmaceuticals, 37 39 39 35 36 36 36 37 35 scientific discoveries, talented employees life sciences, financial services and 32 27 27 25 and entrepreneurs, all of which—coupled 22 information technology sectors— 20 19 16 with the area’s extensive network of venture combined with its large number of 14 10 capitalists and other service providers— 7 8 9 9 5 3 Fortune 500 companies—will provide 5 5 1 0 2 1 should maintain New England’s status as a favorable environment for VC-backed 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 one of the country’s most appealing startup companies in 2006. < environments for emerging companies. Source: Dow Jones VentureOne Source: Dow Jones VentureOne Counsel of Choice for Venture Capital Financings SERVING INDUSTRY LEADERS IN TECHNOLOGY, LIFE SCIENCES, FINANCIAL SERVICES, COMMUNICATIONS AND BEYOND DASHED LINE IS US SIZE DASHED

$60,000,000 $42,000,000 $18,500,000 $10,000,000 $13,500,000 $20,000,000 $26,600,000 $20,000,000 $59,800,000 First Round Third Round Second Round First Round Third Round Second Round Late Stage Third Round Second Round August 2005 October 2005 April 2005 January 2005 September 2005 March 2005 September 2005 January 2005 May 2005

$10,000,000 $15,000,000 $13,750,000 $10,000,000 $8,500,000 $12,500,000 $8,400,000 $18,000,000 Second Round Third Round Second Round Late Stage Third Round Second Round First Round Fourth Round January 2005 March 2005 December 2005 July 2005 August 2005 May 2005 February 2005 September 2005

$12,000,000 $10,000,000 $11,000,000 $6,300,000 $15,000,000 $10,000,000 $15,000,000 $12,000,000 $15,000,000 First Round Second Round Third Round First Round Third Round Second Round Late Stage Third Round Late Stage December 2005 February 2005 September 2005 October 2005 May 2005 April 2005 April 2005 November 2005 May 2005

$12,000,000 $7,500,000 $8,000,000 $20,000,000 $9,000,000 $13,000,000 $15,000,000 $15,000,000 Second Round Second Round Second Round Second Round Second Round First Round Late Stage Fourth Round June 2005 March 2005 March 2005 May 2005 December 2005 February 2005 March 2005 April 2005 14 European Review and Outlook European Review and Outlook

2005 Review European Venture Capital Financings – 2000 to 2005 IPOs in 2005 (5.6 years). The median European Venture-Backed IPOs – 2000 to 2005 $ amount invested prior to IPO declined $ The European venture capital market in # of deals in millions # of deals Median pre-IPO valuation (in millions) from €13.3 million in 2004 to €11.1 million 2005 produced a solid level of investment in 2005. activity and a significant improvement in liquidity events. The strength of the European VC-backed company IPO market cut across industry 182 128.0 In 2005, there were 995 reported venture 3,453 16.7 lines in 2005, with information technology capital financings with proceeds of €3.77 companies producing 25 IPOs and life billion in Europe, compared to 1,093 2,364 sciences companies contributing 22. The financings with proceeds of €4.16 billion in 8.5 United Kingdom was the largest source 56.3 2004. However, we expect the level of 1,444 of IPOs, with 21, followed by France with 60 1,175 1,093 42.0 venture capital activity in 2005 to equal 995 34.9 4.1 4.2 13 and Germany with eight. 3.5 3.8 26.9 35 or exceed 2004 activity once all transactions 28 20.4 have been reported. Despite the strong IPO results of 2005, 13 9

the lack of a public market where high- 2000 2001 2002 2003 2004 2005 The median financing size in Europe, 2000 2001 2002 2003 2004 2005 growth companies can raise substantial although lagging significantly behind the US Source: Dow Jones VentureOne Source: Dow Jones VentureOne sums of money and provide sufficient median, increased from €1.8 million in 2004 liquidity to investors, like Nasdaq, remains to €2.0 million in 2005—the fourth an issue for European VC-backed consecutive annual increase, and the highest companies seeking exits. level since 2000—due to an increase in larger, later-stage rounds. Later stage financings The number of reported acquisitions climbed from 38% of all rounds in 2004 of European venture-backed companies to 43% in 2005, while seed and first-round declined from 194 in 2004 to 163 in 2005. deals declined from 37% to 34%. However, the reported 2005 figure already European Venture Capital Financings by Industry – 2000 to 2005 exceeds the number of acquisitions in every Acquisitions of European Venture-Backed Companies – 2000 to 2005 With a total of 288 deals, software companies Biopharmaceuticals Medical Devices Other Life Sciences Software Communications & Networking Other IT other year since 2000, and we expect the total # of deals again accounted for the largest sector of the Life Sciences Information Technology number of acquisitions in 2005 to approach European venture capital market in 2005, the number in 2004 once all transactions 194 representing 29% of all financings, as 1,908 have been reported. More than half of the compared to 30% in 2004. Financings by 163 year’s reported deals (86) were for 149 software companies produced €806 million 143 143 information technology companies, and 47 in reported proceeds in 2005, compared 1,335 were for life sciences companies. UK-based to €896 million the year before. companies accounted for 47 deals, followed 93 806 by France with 27 and Germany with 26. Biopharmaceutical companies produced 632 587 531 164 financings in 2005, or 16.5% of all 413 381 311 287 306 In an encouraging sign, the median deals—down slightly from 17% in 2004. 274 acquisition price increased from €17.8 Total proceeds in this sector edged down 2000 2001 2002 2003 2004 2005 million in 2004 to €22.5 million in 2005— 2000 2001 2002 2003 2004 2005 from €1.42 billion to €1.21 billion. Due even though the median amount raised to their larger average deal size, Source: Dow Jones VentureOne Source: Dow Jones VentureOne prior to acquisition remained at €6 million. biopharmaceutical companies accounted The higher acquisition prices reflected the for 32% of the total amount invested in produced 30% of all deals in 2005 (up from time since 2001, the number of IPOs considered a landmark investment to which On the heels of the best year for liquidity greater maturity of the acquired companies, 2005, compared to 34% in 2004. The largest 28% in 2004), followed by France with 21% by European VC-backed companies all other European VC investments are events by European VC-backed companies whose median time from initial equity European biopharmaceutical financing (up from 18% in 2004), Germany with 10% exceeded the number of IPOs by US compared for the foreseeable future. since 2000, conditions appear conducive funding to acquisition increased from 4.2 of 2005 was Oxagen’s $59.8 million deal. (down from 12% in 2004), and Sweden with VC-backed companies. to continued strength in the IPO and years in 2004 to 4.9 years in 2005—still less 9% (down from 13% in 2004). acquisition markets. Since 2006 will be an than the median time of 5.4 years for 2006 Outlook Financings by European medical device Median IPO proceeds soared 45%, important year for fundraising by European € € acquired VC-backed companies in the companies edged up from 8% of deals in The IPO market for European venture- from 10.3 million in 2004 to 14.9 million For 2006, we expect European venture venture capital funds, funds will be seeking United States in 2005. 2004 to 9% in 2005, while reported proceeds backed companies enjoyed its best year in 2005, and median pre-IPO valuations capital investment to remain steady or to trade sales and IPOs of VC-backed in this sector increased 30%, from €245 since 2000. The number of IPOs jumped climbed 20%, from €34.9 million to €42.0 The €2.08 billion purchase of Skype increase modestly. We also expect the companies to demonstrate investment million in 2004 to €318 million in 2005— from 35 in 2004 to 60 in 2005—marking million. These increases reflect, in part, Technologies by eBay was the largest median financing size of VC deals in Europe returns to their limited partners. Also, the largest amount invested in medical the highest yearly total since the 182 IPOs a more mature base of IPO companies. The European VC-backed company acquisition of to continue to increase as improved the IPOs of Optos and Qinetiq on the device companies since at least 2000. in 2000 and surpassing the total number median time from initial equity funding to the year—and more than four times the size liquidity conditions enable more larger, London Stock Exchange in January 2006 of IPOs for the period 2002–2004— IPO was 5.9 years in 2005, up from 4.3 years of the largest US deal in 2005. In terms of later-stage rounds—particularly deals led may herald an increasing receptiveness The United Kingdom remains the largest and the year ended on a high note, with in 2004, and longer than the median time prominence, size and return on investment, it by private equity firms—to be completed. in the public markets to venture-backed venture capital market in Europe, having 23 IPOs in the fourth quarter. For the first for US VC-backed companies completing is likely that Skype Technologies will be technology companies. < European Review and Outlook European Review and Outlook 15

the lack of a public market where high- 2000 2001 2002 2003 2004 2005 The median financing size in Europe, 2000 2001 2002 2003 2004 2005 growth companies can raise substantial although lagging significantly behind the US Source: Dow Jones VentureOne Source: Dow Jones VentureOne sums of money and provide sufficient median, increased from €1.8 million in 2004 liquidity to investors, like Nasdaq, remains to €2.0 million in 2005—the fourth an issue for European VC-backed consecutive annual increase, and the highest companies seeking exits. level since 2000—due to an increase in larger, later-stage rounds. Later stage financings The number of reported acquisitions climbed from 38% of all rounds in 2004 of European venture-backed companies to 43% in 2005, while seed and first-round declined from 194 in 2004 to 163 in 2005. deals declined from 37% to 34%. However, the reported 2005 figure already European Venture Capital Financings by Industry – 2000 to 2005 exceeds the number of acquisitions in every Acquisitions of European Venture-Backed Companies – 2000 to 2005 With a total of 288 deals, software companies Biopharmaceuticals Medical Devices Other Life Sciences Software Communications & Networking Other IT other year since 2000, and we expect the total # of deals again accounted for the largest sector of the Life Sciences Information Technology number of acquisitions in 2005 to approach European venture capital market in 2005, the number in 2004 once all transactions 194 representing 29% of all financings, as 1,908 have been reported. More than half of the compared to 30% in 2004. Financings by 163 year’s reported deals (86) were for 149 software companies produced €806 million 143 143 information technology companies, and 47 in reported proceeds in 2005, compared 1,335 were for life sciences companies. UK-based to €896 million the year before. companies accounted for 47 deals, followed 93 806 by France with 27 and Germany with 26. Biopharmaceutical companies produced 632 587 531 164 financings in 2005, or 16.5% of all 413 381 311 287 306 In an encouraging sign, the median deals—down slightly from 17% in 2004. 274 acquisition price increased from €17.8 Total proceeds in this sector edged down 2000 2001 2002 2003 2004 2005 million in 2004 to €22.5 million in 2005— 2000 2001 2002 2003 2004 2005 from €1.42 billion to €1.21 billion. Due even though the median amount raised to their larger average deal size, Source: Dow Jones VentureOne Source: Dow Jones VentureOne prior to acquisition remained at €6 million. biopharmaceutical companies accounted The higher acquisition prices reflected the for 32% of the total amount invested in produced 30% of all deals in 2005 (up from time since 2001, the number of IPOs considered a landmark investment to which On the heels of the best year for liquidity greater maturity of the acquired companies, 2005, compared to 34% in 2004. The largest 28% in 2004), followed by France with 21% by European VC-backed companies all other European VC investments are events by European VC-backed companies whose median time from initial equity European biopharmaceutical financing (up from 18% in 2004), Germany with 10% exceeded the number of IPOs by US compared for the foreseeable future. since 2000, conditions appear conducive funding to acquisition increased from 4.2 of 2005 was Oxagen’s $59.8 million deal. (down from 12% in 2004), and Sweden with VC-backed companies. to continued strength in the IPO and years in 2004 to 4.9 years in 2005—still less 9% (down from 13% in 2004). acquisition markets. Since 2006 will be an than the median time of 5.4 years for 2006 Outlook Financings by European medical device Median IPO proceeds soared 45%, important year for fundraising by European € € acquired VC-backed companies in the companies edged up from 8% of deals in The IPO market for European venture- from 10.3 million in 2004 to 14.9 million For 2006, we expect European venture venture capital funds, funds will be seeking United States in 2005. 2004 to 9% in 2005, while reported proceeds backed companies enjoyed its best year in 2005, and median pre-IPO valuations capital investment to remain steady or to trade sales and IPOs of VC-backed in this sector increased 30%, from €245 since 2000. The number of IPOs jumped climbed 20%, from €34.9 million to €42.0 The €2.08 billion purchase of Skype increase modestly. We also expect the companies to demonstrate investment million in 2004 to €318 million in 2005— from 35 in 2004 to 60 in 2005—marking million. These increases reflect, in part, Technologies by eBay was the largest median financing size of VC deals in Europe returns to their limited partners. Also, the largest amount invested in medical the highest yearly total since the 182 IPOs a more mature base of IPO companies. The European VC-backed company acquisition of to continue to increase as improved the IPOs of Optos and Qinetiq on the device companies since at least 2000. in 2000 and surpassing the total number median time from initial equity funding to the year—and more than four times the size liquidity conditions enable more larger, London Stock Exchange in January 2006 of IPOs for the period 2002–2004— IPO was 5.9 years in 2005, up from 4.3 years of the largest US deal in 2005. In terms of later-stage rounds—particularly deals led may herald an increasing receptiveness The United Kingdom remains the largest and the year ended on a high note, with in 2004, and longer than the median time prominence, size and return on investment, it by private equity firms—to be completed. in the public markets to venture-backed venture capital market in Europe, having 23 IPOs in the fourth quarter. For the first for US VC-backed companies completing is likely that Skype Technologies will be technology companies. < 16 Law Firm Rankings – Europe Trends in Venture Capital Financing Terms

Counsel to Companies Receiving VC Financing in 2005 – Europe Based on hundreds of venture capital financing transactions we handled from 2002 to 2005 for companies and venture capitalists in the United States and Europe, we have compiled the following deal data: Wilmer Cutler Pickering Hale and Dorr LLP 22 Deals with Multiple Liquidation Preferences 2002 2002 Range 2003 2003 Range 2004 2004 Range 2005 2005 Range Baker & McKenzie 9 A “multiple liquidation preference” is a Series A 38% 1x – 2x 0% N/A 22% 1.25x – 5x 3% 1.5x Bird & Bird 8 provision that provides that the holders of preferred stock are entitled to receive Post–Series A 25% 1.5x – 3x 24% 1.5x – 5x 11% 1.5x – 3x 110% 1.5x – 2x Linklaters 8 more than 1x their money back before Advokatfirman Lindahl 7 the proceeds of the liquidation or sale are distributed to holders of common stock. CMS Hasche Sigle 7 Deals with Participating Preferred 2002 2002 Range 2003 2003 Range 2004 2004 Range 2005 2005 Range Fidal Legal 7 “Participating preferred” stock entitles if capped if capped if capped if capped Hewitsons 7 the holder not only to receive its stated Series A 56% 1.5x – 2x 61% 2x – 4x 56% 2x – 5x 58% 2x – 5x Mannheimer Swartling 7 liquidation preference, but also to receive a pro rata share (assuming conversion of Olswang 7 the preferred stock into common stock) Post–Series A 64% 2x – 5.5x 76% 2x – 5x 54% 1.75x – 5x 71% 2x – 5x of any remaining proceeds available for Osborne Clarke 7 distribution to holders of common stock.

Eversheds LLP 6 Deals with an Accruing Dividend 2002 2002 Range 2003 2003 Range 2004 2004 Range 2005 2005 Range Landwell 6 “Accruing dividends” are generally Series A 81% 30% 47% 78% Taylor Wessing 6 payable upon liquidation or redemption of the preferred stock. Because the sale Post–Series A 44% 52% 48% 87%

The above chart is based on European companies that completed a seed, first, second, later stage or restart round of venture capital financing in 2005. of the company is generally deemed to Source: Dow Jones VentureOne be a “liquidation,” the accrued dividend effectively increases the liquidation preference of the preferred stock. Counsel to VC-Backed Companies at Year-End 2005 – Europe Anti-Dilution Provisions 2002 2002 Range 2003 2003 Range 2004 2004 Range 2005 2005 Range Wilmer Cutler Pickering Hale and Dorr LLP 53 A “full ratchet” anti-dilution formula is Series A Linklaters 29 more favorable to the investors because it Full Ratchet 28% 3% 3% 0% provides that the conversion price of the Weighted Average 72% 97% 97% 100% CMS Hasche Sigle 28 preferred stock will be reduced to the price paid in the dilutive issuance, Taylor Wessing 27 Post–Series A regardless of how many shares are Vinge 26 involved in the dilutive issuance. Full Ratchet 24% 30% 7% 16% In contrast, a “weighted average” anti- Weighted Average 76% 70% 93% 84% DLA Nordic 25 dilution formula takes into account the dilutive impact of the dilutive issuance Ernst & Young Legal 25 based upon factors such as the number of shares and the price involved in the Eversheds LLP 25 dilutive issuance and the number of Osborne Clarke 24 shares outstanding before and after the dilutive issuance. Baker & McKenzie 23 Deals with Pay-to-Play Provisions 2002 2002 Range 2003 2003 Range 2004 2004 Range 2005 2005 Range Bird & Bird 22 “Pay-to-play” provisions provide an Total 23% 31% 26% 25% Jones Day 22 incentive to investors to invest in future % of Total That 30% 50% 67% 55% down rounds of financing. Investors that Landwell 21 Convert to do not purchase their full pro rata share Common Stock in a future down round lose certain rights Mannheimer Swartling 21 (e.g., their anti-dilution rights are taken % of Total 70% 50% 33% 45% away or their shares of preferred stock That Convert to Shadow The above chart is based on European companies that have completed a seed, first, second, later stage or restart round of venture capital financing may be converted into common stock). and were private and independent as of the end of 2005. Preferred Stock Source: Dow Jones VentureOne Law Firm Rankings – Europe Trends in Venture Capital Financing Terms 17

The above chart is based on European companies that completed a seed, first, second, later stage or restart round of venture capital financing in 2005. of the company is generally deemed to Source: Dow Jones VentureOne be a “liquidation,” the accrued dividend effectively increases the liquidation preference of the preferred stock. Counsel to VC-Backed Companies at Year-End 2005 – Europe Anti-Dilution Provisions 2002 2002 Range 2003 2003 Range 2004 2004 Range 2005 2005 Range Wilmer Cutler Pickering Hale and Dorr LLP 53 A “full ratchet” anti-dilution formula is Series A Linklaters 29 more favorable to the investors because it Full Ratchet 28% 3% 3% 0% provides that the conversion price of the Weighted Average 72% 97% 97% 100% CMS Hasche Sigle 28 preferred stock will be reduced to the price paid in the dilutive issuance, Taylor Wessing 27 Post–Series A regardless of how many shares are Vinge 26 involved in the dilutive issuance. Full Ratchet 24% 30% 7% 16% In contrast, a “weighted average” anti- Weighted Average 76% 70% 93% 84% DLA Nordic 25 dilution formula takes into account the dilutive impact of the dilutive issuance Ernst & Young Legal 25 based upon factors such as the number of shares and the price involved in the Eversheds LLP 25 dilutive issuance and the number of Osborne Clarke 24 shares outstanding before and after the dilutive issuance. Baker & McKenzie 23 Deals with Pay-to-Play Provisions 2002 2002 Range 2003 2003 Range 2004 2004 Range 2005 2005 Range Bird & Bird 22 “Pay-to-play” provisions provide an Total 23% 31% 26% 25% Jones Day 22 incentive to investors to invest in future % of Total That 30% 50% 67% 55% down rounds of financing. Investors that Landwell 21 Convert to do not purchase their full pro rata share Common Stock in a future down round lose certain rights Mannheimer Swartling 21 (e.g., their anti-dilution rights are taken % of Total 70% 50% 33% 45% away or their shares of preferred stock That Convert to Shadow The above chart is based on European companies that have completed a seed, first, second, later stage or restart round of venture capital financing may be converted into common stock). and were private and independent as of the end of 2005. Preferred Stock Source: Dow Jones VentureOne 18 Practical Advice for Living with Section 409A Practical Advice for Living with Section 409A

Most venture-backed companies options and stock appreciation rights regulations provide that the following confirm that the valuation would satisfy in 409A parlance, unless the plan or will be exempt from Section 409A, do not have deferred salary or bonus with below-market exercise prices; factors should be considered: the “any reasonable valuation” standard. agreement is exempt from the new rules. provided that the payments are made plans and understandably expected the some employment, severance and For future stock option grants: The proposed regulations include several in a lump sum or within the short-term ■ the value of tangible and intangible assets; new tax rules on deferred compensation change-in-control agreements; and potential exemptions for separation pay deferral period described above. ■ At a minimum, the board should to be of little relevance to their day-to-day SERPs or excess benefit plans; but ■ the present value of future cash flows; arrangements for involuntarily terminated undertake a rigorous assessment of Non-Exempt Arrangements. It is also operations. However, new Section 409A employees. However, the proposed ■ Excludes: retirement plans; vacation, ■ the qualitative and quantitative facts possible to structure non-exempt of the Internal Revenue Code reaches many the market value of stock or other exemptions are available only for sick, death and disability benefits; most and circumstances related to the value of separation pay arrangements in a manner arrangements not historically considered equity interests in similar companies; involuntary terminations, and no specific options and stock appreciation rights the company’s stock in order to establish that complies with Section 409A. For deferred compensation, including stock exemption has been provided for with fair market value exercise prices; ■ control premiums and discounts the fair market value. This analysis should example, separation pay arrangements options and severance payments. separation payments upon voluntary ESPPs; restricted stock; short-term for lack of marketability; and be fully documented in corporate records, with multiple-year payouts or those terminations, including “good reason” deferrals, and certain foreign plans. including board minutes. As a result, management and directors ■ that include pro-employee “good reason” whether the valuation is consistent terminations. Thus, separation payments of venture-backed companies must triggers could be structured to comply with valuations used for other ■ The safest approach is to have an made upon a voluntary termination will understand the impact of Section 409A Stock Options with the new rules. In any case, whenever corporate purposes. independent third-party valuation of more likely be subject to Section 409A on compensation arrangements. Following a separation payment is contemplated, Stock options with an exercise price that the company’s stock contemporaneous if paid pursuant to an agreement in place a brief overview of Section 409A, we offer What does the IRS guidance mean from whether at the time an employment is at least equal to the fair market value with option grants. For practical prior to the termination, rather than one practical advice for VC-backed companies a practical perspective? Our thoughts agreement is negotiated or at the time of the common stock on the date of reasons, this may require a company negotiated at the time of termination. on how to implement stock option and recommendations are as follows: of a termination, companies need to grant, and that do not otherwise have a to limit the number of times that programs and severance payment Exemptions. The following exemptions to consider the application of Section 409A. deferral feature, are exempt from Section Pre-2005 Grants. Stock options granted options are granted each year. arrangements in light of Section 409A. before January 1, 2005 should be exempt Section 409A for separation pay are the most 409A. Thus, the most significant issue ■ If recurring third-party valuations would from Section 409A, provided the board likely to be used by VC-backed companies: Conclusion for venture-backed companies under be prohibitively expensive, the board Overview Section 409A is whether the board’s made a good faith attempt to establish might engage a third party to value the ■ Payments made upon an involuntary Venture-backed companies have, to a large a fair market value exercise price for the Section 409A applies to all deferred process for determining fair market company’s stock as of a specific date and termination will be exempt from Section extent, avoided the direct impact of the options and the options do not otherwise compensation plans and agreements value will be sufficient to exempt stock to provide the methodology used to 409A, provided that the payments do not far-reaching regulatory changes in the last include a deferral feature. A company that entered into, or vesting after, option grants from the new law. The IRS determine that value. The board could exceed the lesser of (i) two times the few years that have significantly affected can satisfy this standard only needs to January 1, 2005. The provision: has provided the following guidance then use that methodology each time it employee’s annual compensation for the public company compensation practices. for determining fair market value: consider the application of Section 409A subsequently grants stock options. The calendar year preceding the year in which In light of Section 409A, however, venture- ■ establishes timing rules specifying to those pre-2005 stock options that were methodology should be updated the termination occurs, and (ii) two times backed companies should examine and, ■ For stock options granted before when an election to defer intentionally issued at a discount or that periodically as the company matures. the maximum amount that can be taken January 1, 2005, a good faith attempt if necessary, alter their compensation compensation must be made; and included a deferral feature. into account under a retirement plan for practices to ensure that the employees to establish a fair market value exercise Recent SEC guidance on cheap stock the year (for 2006, this limit is $220,000). ■ dictates the permissible distribution and advisors who are helping to build price for stock options (that is, the same Post-January 1, 2005 Grants. For options is another reason for later-stage In order to fall within this exemption, events for deferred compensation. the business are not adversely affected standard historically used for incentive granted on or after January 1, 2005, the companies that may be IPO candidates all payments must be made no later than stock option purposes) is sufficient. standard of “any reasonable valuation by the new tax law. < If a compensation arrangement is not to seek an independent appraisal. December 31 of the second calendar year method” for determining fair market value following the calendar year in which the compliant with, or exempt from, Section ■ For stock options granted on or under Section 409A is applicable until final It is too soon to tell if any one valuation 409A, the recipient will be required to pay after January 1, 2005, the more termination occurs. regulations are issued. It is clear, however, method will emerge as the standard income tax when the arrangement vests, exacting standard of “any reasonable that this standard is higher than the practice for venture-backed companies ■ An agreement that provides for payments and possibly interest and a 20% penalty valuation method” must be used. incentive stock option standard. Moreover, and, in any case, we expect that the to be made solely upon an involuntary tax. In addition, the company may have In addition, the IRS has issued proposed while the regulations are not yet effective, method used by such companies will termination will be exempt from reporting and withholding obligations. valuation regulations that may be relied and may be revised before issued in final change as they mature. A very early stage Section 409A, regardless of the amount Deferred compensation includes any on immediately even though they are not form, they are indicative of the approach company may rely on its board to make the of the payments, provided that the payments are made within the “short- agreement, plan or arrangement that scheduled to become effective before and level of scrutiny that the IRS expects determination of fair market value because term deferral” period. A short-term provides for a deferral of compensation, January 1, 2007. The proposed regulations with respect to valuation. As a result, the relevant facts and circumstances may deferral exists if the payments are made with very limited exceptions. A deferral provide that the fair market value of the common practice of valuing private be limited during the company’s infancy. by the later of (i) the 15th day of the of compensation exists when there is private company stock must be determined company stock based on rule-of-thumb Conversely, a more mature company may third month following the employee’s a legally binding right in a tax year to by the reasonable and consistent discounts and cursory board resolutions turn to a valuation firm as the facts relating tax year in which the involuntary compensation that is payable in a later application of a reasonable valuation stating that “the Board has determined to valuation become more numerous and termination occurs, and (ii) the 15th year. A legally binding right can exist method that considers all relevant facts that the fair market value of the common complex—and more subject to second- day of the third month following the even if payment of the compensation and circumstances. A valuation performed stock is $X” will not be sufficient for guessing by the IRS. end of the company’s tax year in which purposes of Section 409A. is subject to contingencies, such as by an independent third party no more the involuntary termination occurs. continued service or termination of than 12 months before the option grant Severance Payments Therefore, for stock options granted service. Deferred compensation: date will be presumed to result in a ■ Payments negotiated at the time of by VC-backed companies on or after In another surprise to many venture- reasonable valuation. If such independent termination, whether as a result of an ■ Includes: salary and bonus deferrals January 1, 2005, boards should carefully backed companies, Section 409A applies valuation is not obtained, the proposed involuntary termination or a voluntary (including accrued salary not paid); scrutinize their valuation process and to severance payments, or “separation pay” resignation, and regardless of the amount, Practical Advice for Living with Section 409A Practical Advice for Living with Section 409A 19

When a company seeks to go public, of the process by which IPO companies ■ the value of tangible and intangible assets; the SEC routinely scrutinizes the complied with the Practice Aid. ■ the present value of future cash flows; company’s pre-IPO grants of options To date, the best practices contained in and other compensatory equity awards ■ the market value of stock or other the Practice Aid have been implemented to assess whether they were properly equity interests in similar companies; primarily in the context of IPOs and valued. A company that underestimated applied to the 12-month period prior ■ the fair value of its common stock in control premiums and discounts to the initial filing of a company’s accounting for stock and option grants— for lack of marketability; and registration statement. Thus, application commonly referred to as having issued ■ of the Practice Aid to pre-IPO grants whether the valuation is consistent “cheap stock”—is required to recognize should now be part of IPO planning. with valuations used for other compensation expense. corporate purposes. In the future, private companies may In the past, the SEC typically allowed begin to apply the Practice Aid earlier a company to estimate the fair value Recommendations for Pre-IPO Companies in their life cycle as a result of: of its stock by using a rule-of-thumb ■ The safest approach is to have an discount from the IPO estimated price ■ GAAP – in connection with all independent third-party valuation of range. Starting last year, however, compensatory equity grants, regardless the company’s stock contemporaneous the SEC has adopted a new approach of whether an IPO is pending; or with option grants. For practical to cheap stock which, when coupled reasons, this may require a company ■ Section 409A – the new deferred with new tax rules governing deferred to limit the number of times that compensation tax provisions. compensation, makes cheap stock issues options are granted each year. more complicated for pre-IPO companies. Section 409A ■ At a minimum, the board should undertake a rigorous assessment of The Practice Aid New Section 409A of the Internal Revenue the qualitative and quantitative facts In 2005, the SEC modified its practice Code, which imposes a 20% penalty tax and circumstances related to the value for reviewing cheap stock issues, and on non-exempt deferred compensation of the company’s stock in order to began to apply the recommendations arrangements, also applies to stock options establish the fair market value. This contained in an AICPA Practice Aid, with exercise prices below the fair market analysis should consider the applicability Valuation of Privately-Held-Company value of the underlying stock. The IRS of the methods contemplated by the Equity Securities Issued as Compensation, has provided the following guidance Practice Aid, as well as the Section initially issued in mid-2004. The Practice for determining fair market value: 409A factors listed above, and should be fully documented in corporate Aid identifies three acceptable valuation ■ For stock options granted before records, including board minutes. methodologies—market-based, income- January 1, 2005, a “good faith attempt” based (such as discounted cash flow) to establish a fair market value exercise ■ If recurring third-party valuations would and asset-based—and establishes a price for stock options (that is, the same be prohibitively expensive, the board hierarchy of valuation methodologies: standard historically used for incentive might engage a third party to value stock option purposes) is sufficient. the company’s stock as of a specific date ■ The preferred method is a valuation and to provide the methodology used at the time of issuance by an ■ For stock options granted after to determine that value. The board could unrelated valuation specialist. January 1, 2005, the more exacting then use that methodology each time standard of “any reasonable ■ If a contemporaneous valuation it subsequently grants stock options. valuation method” must be used. is not possible, the Practice Aid The methodology will need to be updated recommends a retrospective valuation Proposed IRS regulations provide that the periodically as the company matures. < by an unrelated valuation specialist. fair market value of private company stock must be determined by the reasonable ■ The final, and least favored, alternative is a valuation established by a so-called and consistent application of a reasonable “related-party valuation specialist,” such valuation method that considers all as the IPO company’s board of directors. relevant facts and circumstances. A valuation performed by an independent The Practice Aid goes into significant third party no more than 12 months before detail as to best practices for valuation the option grant date will be presumed to of equity-based compensation by result in a reasonable valuation. Otherwise, private companies, and the SEC requires the following factors should be considered: relatively extensive prospectus disclosure VC Fund Formation Review and Outlook 21

Fundraising Commitments to US Venture Capital Funds – 1996 to 2005 The vigorous pace of 2004 US venture $ billions fund formation activity continued in 2005.

Total committed capital in 2005 was $22.2 83.2 billion, an increase of 19% from the $18.7 billion in 2004. For the second consecutive 57.6 year, total commitments were up from the 50.2 preceding year, although total fundraising was substantially smaller than the record- 26.7 22.2 breaking amounts seen in 1999–2001. 17.1 18.7 12.7 13.1 9.4 We expect that the venture fund formation market will remain robust in 2006. 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Numerous funds are currently in the Source: Dow Jones VentureOne market and planning first- and second- quarter closings, and demand from Any misleading or incorrect data—even even the most egregious behavior. But institutional investors appears to be strong. if based on a genuine mistake under the those rules are changing. Fund investors We expect that general partners will pressure of a deadline—could result in have brought lawsuits against funds for continue to seek to avoid capital overhang potential liability. Funds are well served mismanagement, and funds have sued by raising funds of moderate size. by cultivating increased discipline in their investors for capital contribution gathering, organizing and updating all defaults and to enforce confidentiality Increased Accountability? such data on a regular basis, with a view provisions. Likewise, funds have litigated toward providing and presenting the against co-investors in connection with In recent years, the corporate world information promptly and effectively. portfolio company investing activities, has seen an increased emphasis on and have sued portfolio companies for Reporting Activities. Venture funds accountability and financial and other misrepresentation and fraud. Disgruntled provide data to their investors on an controls, which has affected both public employees and departing general annual and quarterly basis, and fund and privately held corporations. To date, partners have also sued fund sponsors. investors’ appetite for information seems venture capital funds have been largely These proceedings have resulted in insatiable. Over the past few years, as unaffected by this trend—at least with disclosure of the internal workings of quarterly and annual fund performance respect to their own internal governance. funds in all aspects of their activities— data has become publicly available, the Notorious for their desire to maintain fundraising, investing and diligence. the confidentiality of their performance data disclosed by funds has become subject and other information, and generally free to review and verification by outsiders. Conclusions. Given the heightened from any type of periodic disclosure Accordingly, funds are gradually becoming emphasis on investor due diligence requirements or government regulation, publicly accountable for the accuracy in funds, the increasing transparency venture capital funds have largely flown of the data they disclose to their investors. of fund data and the greater likelihood under the radar on accounting and of litigation, venture funds need to Investing Activities. Fund diligence on financial controls issues. However, recent recognize that the way they conduct prospective portfolio companies must be trends in venture fund formation and their internal activities is more likely thorough and defensible. Recent lawsuits funds’ investment activities suggest that than ever to become a matter of public involving write-offs of portfolio company venture capital funds will enhance their record. Although they may not be legally securities by buyout funds have resulted accounting and financial controls in required to report such activities on a in intense examination of fund investing several arenas. periodic basis, venture funds should activities—and underscore the need to stand ready to disclose documentation of document investment decisions carefully Fundraising Activities. As institutional material decisions and reveal the levels and to maintain records that can survive investors have become increasingly subject of care and diligence they have applied the withering scrutiny of litigation. to scrutiny, they have in turn begun to to decision-making. Funds need to be conduct more thorough and methodical Litigation Environment. For decades, prepared to read about their internal evaluations of the funds in which they investors in venture capital funds generally activities in the business section of invest. Institutional investors now displayed their dissatisfaction with fund the local newspaper or in an Internet routinely seek a broad array of management by declining to invest in new newsletter. If they would be uncomfortable performance, background and other data. funds sponsored by the same managers. with that type of disclosure, they should The failure of a fund to provide the Similarly, general partners hesitated to reevaluate the way they make and requested information promptly and take action against limited partners for document their important decisions. < professionally hurts its fundraising efforts. 22 M&A Deal Terms in Sales of VC-Backed Companies

We reviewed all merger transactions involving venture-backed targets signed up or consummated in 2004 and 2005 (as reported in VentureSource)—a total of 54 transactions in 2004 and 39 transactions for 2005—where the merger documentation was publicly available and the deal value was $25 million or more. Of the 2004 merger transactions, 23 (or 43%) were for cash, 22 (or 41%) were for stock and nine (or 17%) were for a mixture of cash and stock. Of the 2005 transactions, 27 (or 69%) were for cash, four (or 10%) were for stock and eight (or 21%) were for a mixture of cash and stock.

Based on this review, we have compiled the following deal data:

Deals with Earn-Out 2004 2005

Deals that provided contingent With Earn-Out 24% 15% consideration based upon post-closing performance of the target (other Without Earn-Out 76% 85% than balance sheet adjustments)

Deals with Indemnification 2004 2005

Deals where the target’s shareholders With Indemnification or the buyer indemnified the other post- By Target’s Shareholders 89% 100% closing for breaches of representations, By Buyer1 37% 46% warranties and covenants

Survival of Representations and Warranties 2004 2005

Length of time that representations Shortest 6 Months 9 Months and warranties survived the closing for indemnification purposes2 Longest 36 Months 24 Months

Most Frequent 12 Months 12 Months

Caps on Indemnification Obligations 2004 2005

Upper limits on indemnification With Cap 85% 100% obligations where representations Limited to Escrow 72% 79% and warranties survived the closing Limited to Purchase Price 7% 5% for indemnification purposes Exceptions to Limits3 74% 73%

Without Cap 15% 0%

1 The buyer provided indemnification in 48% of the 2004 transactions and 25% of the 2005 transactions where buyer stock was used as consideration. In 65% of the 2004 transactions and 17% of the 2005 transactions where the buyer provided indemnification, buyer stock was used as consideration. 2 Measured for representations and warranties generally; specified representations and warranties may survive longer. 3 Generally, exceptions were for fraud and willful misrepresentations. M&A Deal Terms in Sales of VC-Backed Companies 23

Escrows 2004 2005

Deals having escrows securing With Escrow 83% 97% indemnification obligations % of Deal Value of the target’s shareholders Lowest 4% 2% Highest 23% 20% Most Frequent 10%–20% 10% Length of Time Shortest 6 Months 6 Months Longest 36 Months 24 Months Most Frequent 12 Months 12 Months Exclusive Remedy 64% 84% Exceptions to Escrow Limit Where Escrow 72% 66% Was Exclusive Remedy4

Baskets for Indemnification 2004 2005

Deals with indemnification where Deductible 39% 38% a specified “first dollar” amount did not count towards indemnification, Threshold 51% 62% expressed either as a “deductible” (where such amount can never be recovered) or as a “threshold” (where such dollar amount cannot be recovered below the threshold but once the threshold is met all such amounts may be recovered)

MAE Closing Condition 2004 2005

Deals where the buyer or the target Condition in Favor of Buyer 81% 82% had as a condition to its obligation to close the absence of a “material Condition in Favor of Target5 30% 13% adverse effect” with respect to the other party or its business

Exceptions to MAE 2004 2005

Deals where definition of “material With Exception6 78% 79% adverse effect” for the target contained specified exceptions

4 Generally, exceptions were for fraud and criminal activity. 5 In 50% of these transactions in 2004 and in 80% of these transactions in 2005, buyer stock was used as consideration. 6 Generally, exceptions were for general economic and industry conditions. 24 Law Firm Rankings – Sales of VC-Backed Companies

Counsel in Sales of Eastern US VC-Backed Companies in 2005

Wilmer Cutler Pickering Hale and Dorr LLP 12

Foley Hoag LLP 6

Cooley Godward LLP 5

DLA Piper Rudnick Gray Cary US LLP 4

Goodwin Procter LLP 4

Mintz Levin Cohn Ferris Glovsky and Popeo, P.C. 4

Morgan, Lewis & Bockius LLP 4

Ropes & Gray LLP 4

Choate, Hall & Stewart LLP 3

Edwards Angell Palmer & Dodge LLP 3

Foley & Lardner LLP 3

Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP 3

Morse, Barnes-Brown & Pendleton, P.C. 3

Testa, Hurwitz & Thibeault, LLP 3

Source: Dow Jones VentureOne

Counsel in Sales of Eastern US VC-Backed Companies – 1996 to 2005

Wilmer Cutler Pickering Hale and Dorr LLP 87

Testa, Hurwitz & Thibeault, LLP 59

Mintz Levin Cohn Ferris Glovsky and Popeo, P.C. 31

Morgan, Lewis & Bockius LLP 31

Nixon Peabody LLP 30

DLA Piper Rudnick Gray Cary US LLP 29

Edwards Angell Palmer & Dodge LLP 27

Cooley Godward LLP 25

Foley Hoag LLP 25

Morris, Manning & Martin, LLP 23

Goodwin Procter LLP 21

Hogan & Hartson L.L.P. 21

Wilson Sonsini Goodrich & Rosati 21

Bingham McCutchen LLP 18

Ropes & Gray LLP 16

The above charts are based on companies located east of the Mississippi River. Source: Dow Jones VentureOne Want to know more about the latest in the IPO and M&A markets?

See our 2005 IPO Report for a detailed analysis of the 2005 IPO market and 2006 outlook. The report features regional IPO market breakdowns, a review of the PIPEs and Rule 144A markets, insight on the recent securities law reforms, recommendations for pre-IPO companies grappling with new twists on cheap stock issues, and a discussion of the emergence of AIM as a possible alternative to Nasdaq for US high-growth companies.

Our 2005 M&A Report offers an in-depth review of the global M&A market and discusses the outlook for 2006. Other highlights include advice on special considerations in California M&A transactions, new guidance on Delaware deal protection provisions, a survey of key terms in sales of VC-backed companies, and practical guidance on avoiding antitrust violations in pre-merger integration planning.

To request a copy of the 2005 IPO Report or the 2005 M&A Report, or to obtain additional copies of the 2005 Venture Capital Report, please contact the WilmerHale Marketing and Business Development Department at [email protected] or call +1 617 526 5600. An electronic copy of this report can be found at www.vcleader.com.

Data Sources All data in this report was compiled from the VentureSource database from Dow Jones VentureOne, except as otherwise described.

Special note on data: All venture capital financing and M&A data discussed in this report is based on currently available information. Due to delayed reporting of some transactions, the 2005 data that is presently available is likely to be adjusted upward over time as additional deals are reported. Based on historical experience, the adjustments in US data are likely to be in the range of 5–10% in the first year following the initial release of data and in smaller amounts in succeeding years, and the adjustments in European data are likely to be more pronounced.

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