Help take your startup to the next step with the new and revised edition of the popular book on the VC deal process—from the co-founders of the Foundry Group
How do venture capital deals come together? This is one of the most frequent questions asked by each generation of new entrepreneurs. Surprisingly, there is little reliable information on the subject. No one understands this better than Brad Feld and Jason Mendelson. The founders and driving force behind the Foundry Group—a venture capital firm focused on investing in early-stage information technology companies—Brad and Jason have been involved in hundreds of venture capital financings. Their investments range from small startups to large Series A venture financing rounds. The new edition of Venture Deals continues to show fledgling entrepreneurs the inner-workings of the VC process, from the venture capital term sheet and effective negotiating strategies to the initial seed and the later stages of development.
Fully updated to reflect the intricacies of startups and entrepreneurship in today's dynamic economic environment, this new edition includes revisions and updates to coverage on negotiating, gender issues, ICO’s, and economic terms. New chapters examine legal and procedural considerations relevant to fundraising, bank debt, equity and convertible debt, how to hire an investment banker to sell a company, and more.
- Provides valuable, real-world insights into venture capital structure and strategy
- Explains and clarifies the VC term sheet and other misunderstood aspects of capital funding
- Helps to build collaborative and supportive relationships between entrepreneurs and investors
- Draws from the author’s years of practical experience in the VC arena
- Includes extensively revised and updated content throughout to increase readability and currency
Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist is a must-have resource for Any aspiring entrepreneur, venture capitalist, or lawyer involved in VC deals as well as students and instructors in related areas of study.
Foreword by Fred Wilson (3rd Edition) xi
Foreword by James Park (3rd Edition) xiii
Foreword by Dick Costolo (1st and 2nd Editions) xv
Preface xvii
Acknowledgments xxiii
Introduction: The Art of the Term Sheet 1
Chapter 1 The Players 3
The Entrepreneur 3
The Venture Capitalist 4
Financing Round Nomenclature 7
Types of Venture Capital Firms 9
The Angel Investor 10
The Syndicate 12
The Lawyer 13
The Accountant 14
The Banker 15
The Mentor 15
Chapter 2 Preparing for Fundraising 17
Choosing the Right Lawyer 17
Proactive versus Reactive 18
Intellectual Property 20
Chapter 3 How to Raise Money 23
“Do. Or Do Not. There is No Try.” 23
Determine How Much You are Raising 24
Fundraising Materials 26
Due Diligence Materials 32
Finding the Right VC 33
Finding a Lead VC 34
How VCs Decide to Invest 35
Using Multiple VCs to Create Competition 38
Closing the Deal 39
Chapter 4 Overview of the Term Sheet 41
The Key Concepts: Economics and Control 42
Chapter 5 Economic Terms of the Term Sheet 45
Valuation and Price 45
Employee Option Pool 47
Warrants 50
How Valuation is Determined 52
Liquidation Preference 54
Pay-to-Play 63
Vesting 66
Exercise Period 70
Antidilution 71
Chapter 6 Control Terms of the Term Sheet 77
Board of Directors 77
Protective Provisions 81
Drag-Along Agreement 85
Conversion 88
Chapter 7 Other Terms of the Term Sheet 91
Dividends 91
Redemption Rights 93
Conditions Precedent to Financing 95
Information Rights 97
Registration Rights 98
Right of First Refusal 100
Voting Rights 102
Restriction on Sales 102
Proprietary Information and Inventions Agreement 103
Co-Sale Agreement 104
Founders’ Activities 105
Initial Public Offering Shares Purchase 106
No-Shop Agreement 107
Indemnification 110
Assignment 110
Chapter 8 Convertible Debt 113
Arguments for and Against Convertible Debt 114
The Discount 116
Valuation Caps 117
Interest Rate 119
Conversion Mechanics 119
Conversion in a Sale of the Company 121
Warrants 122
Other Terms 125
Early Stage versus Late Stage Dynamics 125
Can Convertible Debt Be Dangerous? 126
An Alternative to Convertible Debt 127
Chapter 9 The Capitalization Table 129
Price per Share with Convertible Notes 131
Pre-Money Method 132
Percentage-Ownership Method 133
Dollars-Invested Method 133
Chapter 10 Crowdfunding 137
Product Crowdfunding 137
Equity Crowdfunding 139
How Equity Crowdfunding Differs 141
Token Crowdfunding 143
Chapter 11 Venture Debt 145
The Role of Debt versus Equity 145
The Players 147
How Lenders Think about Loan Types 148
Economic Terms 151
Amortization Terms 154
Control Terms 157
Negotiation Tactics 161
Restructuring the Deal 163
Chapter 12 How Venture Capital Funds Work 167
Overview of a Typical Structure 168
How Firms Raise Money 169
How Venture Capitalists Make Money 171
How Time Impacts Fund Activity 175
Reserves 177
Cash Flow 179
Cross-Fund Investing 179
Departing Partners 181
Corporate Venture Capital 181
Strategic Investors 183
Fiduciary Duties 184
Implications for the Entrepreneur 185
Chapter 13 Negotiation Tactics 187
What Really Matters? 187
Preparing for the Negotiation 188
A Brief Introduction to Game Theory 191
Negotiating in the Game of Financings 193
Negotiating Other Games 194
Negotiating Styles and Approaches 195
Collaborative Negotiation versus Walk-Away Threats 199
Building Leverage and Getting to Yes 200
Things Not to Do 203
Great Lawyers versus Bad Lawyers versus No Lawyers 205
Can You Make a Bad Deal Better? 206
Chapter 14 Raising Money the Right Way 209
Don’t Be a Machine 209
Don’t Ask for a Nondisclosure Agreement 210
Don’t Email Carpet-Bomb VCs 210
No Often Means No 211
Don’t Ask for a Referral If You Get a No 211
Don’t Be a Solo Founder 212
Don’t Overemphasize Patents 213
Don’t Be Silent If You Witness Bad Behavior 213
Chapter 15 Issues at Different Financing Stages 215
Seed Deals 215
Early Stage 216
Mid and Late Stages 217
Chapter 16 Letters of Intent: The Other Term Sheet 221
Structure of a Deal 222
Asset Deal versus Stock Deal 225
Form of Consideration 227
Assumption of Stock Options 228
Representations, Warranties, and Indemnification 232
Escrow 233
Confidentiality/Nondisclosure Agreement 235
Employee Matters 236
Conditions to Close 237
The No-Shop Clause 238
Fees, Fees, and More Fees 239
Registration Rights 240
Shareholder Representatives 241
Chapter 17 How to Engage an Investment Banker 243
Why Hire an Investment Banker? 243
How to Choose an M&A Adviser 245
Negotiating the Engagement Letter 247
Helping Your Banker Maximize the Outcome 251
Chapter 18 Why Do Term Sheets Even Exist? 253
Constraining Behavior and the Alignment of Incentives 254
Transaction Costs 255
Agency Costs and Information Asymmetry 256
Reputation Constraints 257
Chapter 19 Legal Things Every Entrepreneur Should Know 259
Intellectual Property 259
Patents 261
Trademarks 262
Employment Issues 263
Type of Corporate Structure 264
Accredited Investors 265
Section 409A Valuations 266
(83)b Elections 267
Founders’ Stock 268
Consultants versus Employees 269
Compensating Service Providers 270
Authors’ Note 273
Appendix A: Sample Term Sheet 275
Appendix B: Foundry Group Term Sheet 285
Appendix C: Sample Letter of Intent 295
Appendix D: Additional Resources 303
Glossary 307
About the Authors 321
Index 323
Excerpt from Startup Communities 333
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