David W Parker - Developer

books

Book: Venture Deals

published on
  • Read: August 2012
  • Rating: 8.5/10

Venture Deals by Brad Feld and Jason Mendelson is a great book on the entire venture capital process. I won’t lie, I had a stigma against VCs, but after reading this book, I’m definitely a lot more open to the value that they provide (I’m also taking Jason Mendelson’s VC class at CU Boulder). My mind is a lot more open to VC now. I would recommend this book to anyone who wants to start a startup, whether they plan on bootstrapping or raising funds. Anyway, on to the book. The book is divided up into different parts or sections or people involved in the VC process.

Chapters:

  1. the players
  2. how to raise money
  3. overview of the term sheet
  4. economic terms of the term sheet
  5. control terms of the term sheet
  6. other terms of the term sheet.
  7. the capitalization table
  8. how venture capital funds work
  9. negotiation tactics
  10. raising money the right way
  11. issues at different financing stages
  12. letters of intent- the other term sheet
  13. legal things every entrepreneur should know

My Notes

There are only two things that matter in the actual term sheet:

  1. Economics
  2. Control

The players:

  • The entrepreneur
  • The venture capitalist
    • Most senior are called managing director or general partner
  • The angel investor
  • The syndicate
    • Name for a collection of investors
  • The lawyer
  • The mentor

When raising funds, focus on a length of time you want to fund your company

Don’t use ranges when raising funds

You can’t predict your revenues, but you should be able to manage your expenses exactly

Ask the VCs for things like introductions to other founders they’ve backed

If a VC passes on a deal with you, politely insist on feedback as to why

Economics

Economics refers to the return the investors will get in a liquidity event.

Terms:

  • Price
  • Premoney = valuation what the investor is valuing the company at today (before investment)
  • Postmoney = valuation of premoney + investment amount
  • Option pool = stock available for employees
    • A larger option pool effectively lowers the premoney valuation
    • Come to your VC negotiations with an option budget: list all hires planning on making and approximate option grant you think it will take for each hire.
  • Warrant = right for investor to purchase a certain numbr of shares at a predefined price for a certain number of years

Some ways VCs value companies:

  • Company Stage
  • Competition with other funding sources
  • Team experience
  • VC’s entry point
  • Numbers
  • Current economic climate

Liquidation preference

  • Actual preference
  • Participation
    • Fully participation or capped participation

In early stage financings, it’s best to have simple liquidation preference and no participation

Pay-to-play: ensures that all investors agree in advance to rules of engagement concerning future financings (generally a good thing)

Control

Control refers to the mechanisms that allow the investors to exercise control over the busines or to veto certain decisions

Terms:

  • Board of directors
  • Protective provisions
    • Veto rights investors have on certain actions
  • Drag-along agreement
    • Gives subset of investors ability to force (drag-along) other investors and founders to sell the company
  • Conversion (normally nonnegotiable)
    • Allows buyers of preferred to convert to common

Other terms

Terms to be aware of: dividends, redemption rights, conditions precedent to financing, information rights, registration rights, right of first refusal, voting rights, restriction on sales, proprietary information and inventions agreement, co-sale agreement, founders’ activities, initial public offering shares purchase, no-shop agreement, indemnification, and assigment

How VC funds work

You need to understand the motivation of the venture capitalist

There’s a great explanation here of the management company structure, as well as how firms raise money

Management fees are typically between 1.5 and 2.5 percent

Carried interest is where VCs make their real money (it’s what they make after they pay back their Limited Partners (LPs))

The commitment period is when VCs are able to invest, usually the first 5 years of a 10 year fund

Spot zombie VCs by asking when they made their last investment

The closer to the end of a VCs fund may potentially mean more pressure for the entrepreneur

Negotiation tactics

This is the chapter that everyone needs to read, whether they want to raise funds or not

Three things that matter when negotiating financing:

  1. Good and fair result
  2. Not killing personal relationships getting there
  3. Understanding the deal you are making

When you go to negotiate (anything), have a plan:

  • Know what you want
  • Know what you are willing to concede
  • Know when you are willing to walk away

Don’t present your term sheet to a VC

You can’t lose a deal point if you don’t open your mouth

Raising money the right way

Don’t ask for a nondisclosure agreement (NDA)

Don’t ask for a referral if you get a no

Don’t be a solo founder

Don’t overemphasize patents

Intellectual property

Employment issues - make sure you hire at-will employees

  • Know at least one good employment lawyer

Incorporate in Delaware

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