Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist
|Author:||Brad Feld and Jason Mendelson|
|Author:||Brad Feld and Jason Mendelson|
Get the inside scoop on what venture capitalists want to see in your startup as you hit the fundraising trail. This is the highly anticipated third edition of the best-selling book which has become the definitive resource for understanding venture capital fundraising.
Whether you are an entrepreneur, lawyer, student or just have an interest in the venture capital ecosystem, Venture Deals is for you. The book dives deeply into how deals are constructed, why certain terms matter (and others don t), and more importantly, what motivates venture capitalists to propose certain outcomes. You ll see the process of negotiating from the eyes of two seasoned venture capitalists who have over 40 years of investing experience as VCs, LPs, angels, and founders. They will teach you how to develop a fundraising strategy that will be a win for all parties involved.
This book is designed to bring transparency to the venture capital funding process and includes such topics as:
And as in the previous editions, this book isn t just a one-sided opinion from venture capitalists, but also has helpful commentary throughout from a veteran CEO who has raised many rounds of financing from many different investors. If you are ready to learn all the secrets and ins and outs of fundraising, Venture Deals is an essential read.
"When I was a founder, VCs hoarded information about how venture capital terms worked to stack the deck in their favor. Along came Brad Feld and Jason Mendelson who started giving away the game by publishing how things worked on their blog. Now you can have all this information provided in an easy and concise format that evens the playing field." - Mark Suster, General Partner, Upfront Ventures
"Ventures Deals has historically been our go to book for entrepreneurs on fund raising. It is a must read for anyone who is embarking on the fundraising process and now we are delighted that it has been updated for the current fundraising environment with all the changes that have happened the past few years." - Bill Aulet, Managing Director, Martin Trust Center for MIT Entrepreneurship
"Having worked with Brad and Jason during the Internet bubble, I witnessed first-hand the experience they gained by doing deals that covered the entire range of issues an entrepreneur faces today. This is a must-read for both entrepreneurs and investors as it lets each side understand the terminology, structures and potential issues inherent in venture deals so they can focus on what really matters, regardless of which side they are on. Every entrepreneur who is raising or considering raising venture capital should read this book!" - Heidi Roizen, Operating Partner, DFJ
"Feld and Mendelson pack a graduate-level course into this energetic and accessible book. The authors' frank style and incisive insight make this a must-read for high-growth company entrepreneurs, early-stage investors, and graduate students. Start here if you want to understand venture capital deal structure and strategies. I enthusiastically recommend." - Brad Bernthal, CU Boulder, Associate Clinical Professor of Law, Technology Policy, Entrepreneurial Law
"Brad and Jason are undoubtedly among the most authentic VCs in the industry today. This book goes far beyond the nuts and bolts of term sheets and venture capital to give invaluable insights into the importance of building relationships based on trust. I'll definitely be recommending this book to all Kauffman Fellows and to every entrepreneur I meet across the world." - Jeff Harbach, President and CEO, Kauffman Fellows
"I have been lucky to have Brad Feld as a mentor as a VC, and watch him advise companies as a board member. Venture Deals is your chance to get some of that advice and wisdom applied to your own startup. Don't miss the opportunity." - Jeff Clavier, Managing Partner, SoftTech VC
"One of the most practical books on venture capital. Every entrepreneur (and their lawyer) should own a copy" - Mike Platt, Colorado Partner-in-Charge� Cooley LLP
"We've worked with Brad & Jason through the highs and lows and highs of a number technology investments. When risk takers share insight, read it. In the case of Brad and Jason, read it twice. We love their refreshing comfort with maximizing risk in the spirit of creating meaningful impact." - Tony Conrad, founder / CEO, About.me and Partner, True Ventures
"Even if your lawyer or VC has done a lot of deals, you should read this book. Nothing hurts a company more than a bad deal structure usually not discovered until a year or two later. This will allow you to look for the pot holes and avoid a lot of pain." - Lesa Mitchell, Managing Director, Techstars Kansas City
"My biggest nightmare is taking advantage of an entrepreneur without even realizing it. It happens because VCs are experts in financings and most entrepreneurs are not. Brad and Jason are out to fix that problem with Venture Deals. This book is long overdue and badly needed." - Fred Wilson, Managing Partner, Union Square Ventures
"A must-read book for entrepreneurs. Brad and Jason demystify the overly complex world of term sheets and M&A, cutting through the legalese and focusing on what really matters. That's a good thing not just for entrepreneurs, but also for venture capitalists, angels, and lawyers. Having an educated entrepreneur on the other side of the table means you spend your time negotiating the important issues and ultimately get to the right deal faster." - Greg Gottesman, Managing Director, Madrona Venture Group
"Venture Deals is a must-read for any entrepreneur contemplating or currently leading a venture-backed company. Brad and Jason are highly respected investors who shoot straight from the hip and tell it like it is, bringing a level of transparency to a process that is rarely well understood. It's like having a venture capitalist as a best friend who is looking out for your best interests and happy to answer all of your questions." - Emily Mendell, Vice President of Communications, National Venture Capital Association
BRAD FELD has been an early-stage investor and entrepreneur for over twenty-five years. Prior to co-founding Foundry Group a Boulder, Colorado-based venture capital firm he co-founded Mobius Venture Capital. Brad also founded Intensity Ventures, a company that helped launch and operate software companies. Prior to this, Brad founded Feld Technologies. He is also a founder of Techstars and has been active with non-profit organizations, including acting as chairperson for the National Center for Women in Technology.
JASON MENDELSON has 20 years of experience in the venture industry. Prior to co-founding Foundry Group, Jason was a Managing Director and Chief Administrative officer at Mobius Venture Capital, where he also served as the firm's general counsel. Besides his experience as a venture investor, Jason has also been a software engineer, startup lawyer, and a co-founder of SRS | Acquiom. He is an adjunct at the University of Colorado Law School where he co-teaches a course on venture capital and entrepreneurship.
Foreword xi Preface xiii Acknowledgments xix Introduction: The Art of the Term Sheet 1 1 The Players 5 The Entrepreneur 5 The Venture Capitalist 6 The Angel Investor 8 The Syndicate 10 The Lawyer 11 The Mentor 13 2 How to Raise Money 15 Do or Do Not; There Is No Try 15 Determine How Much You Are Raising 16 Fund-Raising Materials 17 Due Diligence Materials 23 Finding the Right VC 23 Finding a Lead VC 25 How VCs Decide to Invest 26 Closing the Deal 28 3 Overview of the Term Sheet 31 The Key Concepts: Economics and Control 32 4 Economic Terms of the Term Sheet 35 Price 35 Liquidation Preference 41 Pay-to-Play 47 Vesting 50 Exercise Period Employee Pool 54 Antidilution 55 5 Control Terms of the Term Sheet 61 Board of Directors 61 Protective Provisions 63 Drag-Along Agreement 68 Conversion 70 6 Other Terms of the Term Sheet 73 Dividends 73 Redemption Rights 75 Conditions Precedent to Financing 77 Information Rights 79 Registration Rights 80 Right of First Refusal 83 Voting Rights 84 Restriction on Sales 85 Proprietary Information and Inventions Agreement 86 Co-Sale Agreement 87 Founders Activities 88 Initial Public Offering Shares Purchase 89 No-Shop Agreement 90 Indemnification 93 Assignment 93 7 The Capitalization Table 95 8 Convertible Debt 99 Arguments For and Against Convertible Debt 100 The Discount 102 Valuation Caps 103 Interest Rate 104 Conversion Mechanics 105 Conversion in a Sale of the Company 107 Warrants 108 Other Terms 110 Early Stage versus Late Stage Dynamics 111 Can Convertible Debt Be Dangerous? 112 9 How Venture Capital Funds Work 115 Overview of a Typical Structure 115 How Firms Raise Money 117 How Venture Capitalists Make Money 118 How Time Impacts Fund Activity 122 Reserves 124 Cash Flow 126 Cross-Fund Investing 127 Departing Partners 127 Fiduciary Duties 128 Implications for the Entrepreneur 128 10 Negotiation Tactics 129 What Really Matters? 129 Preparing for the Negotiation 130 A Brief Introduction to Game Theory 132 Negotiating in the Game of Financings 134 Negotiating Styles and Approaches 136 Collaborative Negotiation versus Walk-Away Threats 139 Building Leverage and Getting to Yes 140 Things Not to Do 142 Great Lawyers versus Bad Lawyers versus No Lawyers 145 Can You Make a Bad Deal Better? 145 11 Raising Money the Right Way 149 Don t Ask for a Nondisclosure Agreement 149 Don t Email Carpet Bomb VCs 150 No Often Means No 150 Don t Ask for a Referral If You Get a No 150 Don t Be a Solo Founder 151 Don t Overemphasize Patents 152 12 Issues at Different Financing Stages 153 Seed Deals 153 Early Stage 154 Mid and Late Stages 154 Other Approaches to Early Stage Deals 155 13 Letters of Intent The Other Term Sheet 157 Structure of a Deal 158 Asset Deal versus Stock Deal 161 Form of Consideration 163 Assumption of Stock Options 164 Representations, Warranties, and Indemnification 167 Escrow 169 Confidentiality/Nondisclosure Agreement 170 Employee Matters 171 Conditions to Close 172 The No-Shop Clause 173 Fees, Fees, and More Fees 174 Registration Rights 175 Shareholder Representatives 176 Intellectual Property 179 Employment Issues 181 State of Incorporation 182 Accredited Investors 182 Filing an 83(b) Election 183 Section 409A Valuations 184 Authors Note 187 Appendix A: Sample Term Sheet 189 Appendix B: Sample Letter of Intent 209 Appendix C: Additional Resources 217 Appendix D: Dick Costolo Foreword Glossary 221 About the Authors 229 Index 231 Excerpt from Startup Communities 237