Midwest Entrepreneurs Seeing Harsh Deal Terms

New financings have picked up this year, but that doesn’t mean entrepreneurs are seeing better deal terms, especially in the Midwest.

In fact, competition for deals is down, and entrepreneurs are paying the price, says attorney David Millard (pictured), chairman of the business department at Barnes & Thornburg LLP, a law firm with 11 offices, mostly in the Midwest.

Millard, a partner in the firm’s Indianapolis office, hasn’t done a formal study of deal terms, but his personal experience shows that very few early stage deals get more than one term sheet these days. In other words, founders have one choice: take it or leave it.

The impact is lower valuations and greater VC ownership. Millard estimates early stage valuations are 10 percent to 20 percent lower than early 2008 for the deals he sees.

“VCs are still unsure about the economy,” he says. “They are far less risk tolerant.” They also aren’t sure how much cash to reserve for follow on rounds.

The result is that venture capitalists are getting a greater percentage of ownership of early stage companies. Based on the deals he has worked on, Millard estimates that the average ownership percent for VCs in early stage deals is now 45 percent to 50 percent, compared with 35 percent to 40 percent in the past.

It isn’t clear if Millard’s personal experience jibes with what VC attorneys in other parts of the country are seeing. For example, Silicon Valley is a much more competitive environment, especially for consumer Internet startups, so Valley entrepeneurs are likely seeing better terms than their Midwest counterparts.

If any peHUB readers have more perspective on this topic, we’d love to hear from you.