Venture Deals: Be Smarter Than Your Lawyer And Venture Capitalist (2011) - Plot & Excerpts
The book is a step by step look at the process and terms of a venture deal aimed at entreprenures raising their first round. It delivers plain language review of the key terms of the relevant investment documents, as well as experienced advice on which ones should be focused on and which ones to accept some standard terms. The advice is certaintly all solid, but as it is aimed at novices, if you have been through a couple of rounds of financing it is questionable if you would get much out of this read. Its worth a quick flip through before buying to make sure there will be enough meat for your situation if you've been through this before. begin the process with certainty, intent and presumed success. no "thinking about" or "considering". you are or are not raising money.set a timeline and an amount; how much do you need to get your company to a meaningful milestone? we chose 18-24 months paying 2-3 engineers, which came to around 300k. pick a specific number, not a range.investors love to join an oversubscribed round. Don't set your target too high or you might scare away Angels who don't feel like they can make a dent.Except the Deck, don't over design your material; make sure it's presented in a clear way, but focus on the content. A demo is highly desirableElevator Pitch - 2-3 paragraphs that someone can email around to say "check out this opportunity". Should talk about the team, product and business, and end with a clear request for the next stepExec Summary - concise, substantive document that forms the basis of an investor's first impression of you. Direct indication of your communication skills. Include the problem you are solving, why it's important to solve and why your team is the right team. Close with high level financial data to show aggressive but sensible expectations of growth.If an investor asks for an exec summary, email it to them the same day (never play "trying to look busy" games)Presentation Deck - form matters a lot. Consider hiring a designer. Make sure you can present in quick pitch settings as well as longer VC meetings.Things That Matter - Problem, Size of MArket, Team Strength, competition, plan, current status, summary financials, use of funds, milestones. 10 slides or less.You can't predict revenue but you better be able to predict expenses. What are the underlying assumptions in your financial model? What's the monthly cash burn rate?VCs expect temos to be under featured, broken, rough, and crash a lot. They know you'll probably end up discarding the demo eventually anyway, and just want to be able to play with something. Watch investors carefully when they play with your product. See how comfortable they are, watch whether their eyes light up and see if they understand what they're using.Due Diligence - bring up any potential messy stuff early on in the process, and assume it would have otherwise come up anyway.If you want advice, ask for money. If you want money, ask for advice."Slow No" from an investor can be hard to figure out. Maybe they're stringing you along, maybe they're too busy, either way just assume they're a "no" and move along. Before running around like a lunatic and trying to get a VC every document they ask for, make sure you're not just the object of a fishing exploration by a junior associate.Find others who have worked with this investor, especially if the company went through a difficult time, and see how the VC handled it.If an investor passes on a deal, politely insist on feedback. Demand feedback, and get used to hearing "your baby is ugly">Don't let lawyers behave badly. They're still a reflection on your company. Make sure that lawyerly communication is woven in with investor-founder communication. Often times the VC has no idea that their lawyer is causing trouble.Term Sheet is not a 'letter of intent' - it's the blue print for the future relationship with this investorpostmoney valuation is simply the pre money valuation plus the total investment amount. Address this ambiguity up front by saying something presumptive like, "I assume you mean $X pre-money" which forces the VC to clarify and makes the entrepreneur seem more savvy.Fully Diluted - Investors will want to see your option pool to be sure they don't get diluted when new hires are given equityNegotiate honestly. Period.Don't take valuation personally.Participating - The investors get their money back first, then get their percentage of the rest of the funds. A $5mm (33%) investment in a company sold for $30mm would result in the investors getting -- 33% of $30mm = $10mm (Participating)-- $5mm (original investment) + 33% of $25mm (remaining) (if there is a cap, it limits the amount of participation)in early stage deals, it's best to have simple, no participation liquidation preferencespay to play- if you do not participate in future rounds of funding, you get converted from preferred to common. bad to use this with small-scale investments (and F+F rounds)don't worry too much about anti-dilution provisions, instead focus on making them irrelevant by succeeding"material" as in , materiality qualifier, is too vague and should be avoided when possibleInvestors should vote as a single voting classdrag-along: be forced to sell if a majority of stakeholders want it to happen. for smaller investments, its a good idea to negotiate this to be a majority-of-common, not of preferred."Non-negotiable, how we always, and "standard" " are hallmarks of poor negotiating and show that you're dealing with rookies.never agree to the 'adverse change redemption' clause!Get key employment terms spelled out (like how to fire the CEO) before you sign a term sheet with a no shop clause.A signed term sheet doesn't mean you have a dealEnsure that your terms regarding your employees' outside activities match the needs of your team; don't introduce a strict IP clause that says you own someone's code if they're a regular open source contributorco-sale agreement lets investors sell along side you (and thus can delay or inhibit a sale of your assets). Insist on a floor below which this does not apply; if you want to sell a few shares to put a down payment on a house, the investors shouldn't be able to interveneno-shop clauses are standard, but ensure your no-shop immediately terminates if the VC ends negotiations. Directors and Officer's Insurance - get it"assignment without transfer of obligation" is a loophole that lets someone receive ownership of assets without the correlated obligations. not an acceptable term.the three things that matter in a deal - mutual fairness, understanding and building a good relationshipthe terms that really matter - valuation, option pool, liquidation prefs, board and voting controls. You don't make money on terms. ask the investors what terms are most important to themavoid investors who have a self-maximizing, winner-take-all, single-game attitudeListen far more than you speak at the beginning of a negotiationDon't respond point-for-point in a negotiation. Take their entire point list and respond as a unitAny form of compensation that is not cash is worth lessdon't over-negotiate management packages early in the deal. Read This Book - Do More Faster - Feld and Cohen
What do You think about Venture Deals: Be Smarter Than Your Lawyer And Venture Capitalist (2011)?
Very useful for entrepreneurs. You'll need to go back to it when you see the real docs.
—ranie
A must-read for any legal professionals who are interested in VC & PE.
—cookies
Interesting book on the venture capital funding process.
—daisy
must read ..book..for every entrepreneur..
—863058
