Synopses & Reviews
Praise for Venture Deals
"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
"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 ofLaw, Technology Policy, Entrepreneurial Law
"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
"The adventure of starting and growing a company can be exhilarating or excruciating—or both. Feld and Mendelson have done a masterful job of shedding light on what can either become one of the most helpful or dreadful experiences for entrepreneurs—accepting venture capital into their firm. This book takes the lid off the black box and helps entrepreneurs understand the economics and control provisions of working with a venture partner."
—Lesa Mitchell, Vice President, Advancing Innovation, Kauffman Foundation
An engaging guide to excelling in today's venture capital arena
Beginning in 2005, Brad Feld and Jason Mendelson, managing directors at Foundry Group, wrote a long series of blog posts describing all the parts of a typical venture capital Term Sheet: a document which outlines key financial and other terms of a proposed investment. Since this time, they've seen the series used as the basis for a number of college courses, and have been thanked by thousands of people who have used the information to gain a better understanding of the venture capital field.
Drawn from the past work Feld and Mendelson have written about in their blog and augmented with newer material, Venture Capital Financings puts this discipline in perspective and lays out the strategies that allow entrepreneurs to excel in their start-up companies. Page by page, this book discusses all facets of the venture capital fundraising process. Along the way, Feld and Mendelson touch on everything from how valuations are set to what externalities venture capitalists face that factor into entrepreneurs' businesses.
- Includes a breakdown analysis of the mechanics of a Term Sheet and the tactics needed to negotiate
- Details the different stages of the venture capital process, from starting a venture and seeing it through to the later stages
- Explores the entire venture capital ecosystem including those who invest in venture capitalist
- Contain standard documents that are used in these transactions
- Written by two highly regarded experts in the world of venture capital
The venture capital arena is a complex and competitive place, but with this book as your guide, you'll discover what it takes to make your way through it.
As each new generation of entrepreneurs emerges, there is a renewed interest in how venture capital deals come together. Yet there really is no definitive guide to venture capital deals. Nobody understands this better than authors Brad Feld and Jason Mendelson. For more than seventeen years, they've been involved in hundreds of venture capital financings, and now, with Venture Deals, they share their experiences in this field with you.
Inspired by a series of blog posts—created by the authors after a particularly challenging deal—this reliable resource demystifies the venture capital financing process and helps you gain a practical perspective of this dynamic discipline.
Whether you're an experienced or aspiringentrepreneur, venture capitalist, or lawyer who partakes in these particular types of deals, youcan benefit from the insights found throughoutthis book.
Engaging and informative, Venture Deals skillfully outlines the essential elements of the venture capital term sheet—from terms related to economics to terms related to control. Feld and Mendelson strive to give a balanced view of the particular terms along with the strategies to getting to a fair deal. In addition to examining the nuts and bolts of the term sheet, Venture Deals also introduces you to the various participants in the process, discusses how fundraising works, reveals how VC firms operate, and describes how to apply different negotiating tactics to your deals. You'll also gain valuable insights into several common legal issues most startups face and, as a bonus, discover what a typical letter of intent to acquire your company looks like.
While it would be desirable to do venture capital deals with a simple agreement on price, a handshake, and a short legal agreement, this rarely happens. Venture Deals reveals how venture financings really work, and will save you a remarkable amount of time and money in your journey to create an amazing company.
For additional information that includes term sheets as well as all of the documents that are generated from the term sheet as part of venture financing, visit the authors' website www.askthevc.com.
About the Author
has been an early-stage investorand entrepreneur for over twenty years. Prior tocofounding Foundry Group—a Boulder, Colorado—based early-stage venture capital fund that invests in information technology companies all over the United States—he cofounded Mobius Venture Capital and, prior to that, founded Intensity Ventures, a company that helped launch and operate software companies and later became a venture affiliate ofthe predecessor to Mobius Venture Capital.
Jason Mendelson has over a decade ofexperience in the venture capital and technologyindustries in a multitude of investing, operational, and engineering roles. Prior to cofounding FoundryGroup, he was a managing director and general counsel for Mobius Venture Capital, where he also acted as its chief administrative partner overseeingall operations of the firm. Mendelson was also an attorney with Cooley LLP, where he practiced corporate and securities law with an emphasis on representation of emerging companies in private and public financings as well as mergers and acquisitions.
Table of Contents
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
Liquidation Preference 41
Employee Pool 54
5 Control Terms of the Term Sheet 61
Board of Directors 61
Protective Provisions 63
Drag-Along Agreement 68
6 Other Terms of the Term Sheet 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
7 The Capitalization Table 95
8 How Venture Capital Funds Work 99
Overview of a Typical Structure 99
How Firms Raise Money 101
How Venture Capitalists Make Money 102
How Time Impacts Fund Activity 106
Cash Flow 110
Cross-Fund Investing 111
Departing Partners 111
Fiduciary Duties 112
Implications for the Entrepreneur 112
9 Negotiation Tactics 113
What Really Matters? 113
Preparing for the Negotiation 114
A Brief Introduction to Game Theory 116
Negotiating in the Game of Financings 118
Negotiating Styles and Approaches 120
Collaborative Negotiation versus Walk-Away Threats 123
Building Leverage and Getting to Yes 124
Things Not to Do 126
Great Lawyers versus Bad Lawyers versus No Lawyers 129
Can You Make a Bad Deal Better? 129
10 Raising Money the Right Way 133
Don’t Ask for a Nondisclosure Agreement 133
Don’t Email Carpet Bomb VCs 134
No Often Means No 134
Don’t Ask for a Referral If You Get a No 134
Don’t Be a Solo Founder 135
Don’t Overemphasize Patents 136
11 Issues at Different Financing Stages 137
Seed Deals 137
Early Stage 138
Mid and Late Stages 138
Other Approaches to Early Stage Deals 139
12 Letters of Intent—The Other Term Sheet 145
Structure of a Deal 146
Asset Deal versus Stock Deal 149
Form of Consideration 151
Assumption of Stock Options 152
Representations, Warranties, and Indemnification 155
Confidentiality/Nondisclosure Agreement 158
Employee Matters 159
Conditions to Close 160
The No-Shop Clause 161
Fees, Fees, and More Fees 162
Registration Rights 163
Shareholder Representatives 164
13 Legal Things Every Entrepreneur Should Know 167
Intellectual Property 167
Employment Issues 169
State of Incorporation 170
Accredited Investors 170
Filing an 83(b) Election 171
Section 409A Valuations 172
Authors’ Note 175
Appendix A: Sample Term Sheet 177
Appendix B: Sample Letter of Intent 197
About the Authors 213