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Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist, 3rd Edition

ISBN: 978-1-119-25975-6
304 pages
December 2016
Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist, 3rd Edition (1119259754) cover image

Description

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:

  • How to raise money;
  • What terms matter and which ones don’t;
  • How to negotiate a fair deal for everyone;
  • What makes venture capitalists tick, including how they are compensated and motivated;
  • How companies are valued by venture capitalists;
  • How all current structures of funding work, including convertible debt, crowdfunding, pre-sales and other non-traditional methods;
  • How these particular issues change through different stages of financing (seed, early, mid and late); and
  • How to avoid business and legal pitfalls that many entrepreneurs make.

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. 

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Table of Contents

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

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Author Information

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.

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Reviews

“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

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