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Brad Feld has been an early-stage investor and entrepreneur for over twenty years. Prior to cofounding 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. Prior to that, he founded Intensity Ventures, a company that helped launch and operate software companies. Feld is also a cofounder of TechStars and has been active with several nonprofit organizations. He is a nationally recognized speaker on the topics of venture capital investing and entrepreneurship.
Jason Mendelson has over a decade of experience in the venture capital and technology industries in a multitude of investing, operational, and engineering roles. Prior to cofounding Foundry Group, he was a managing director and general counsel for Mobius Venture Capital, where he also acted as its chief administrative partner overseeing all 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.
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
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
14 Legal Things Every Entrepreneur Should Know 179
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
Glossary 221
About the Authors 229
Index 231
Excerpt from Startup Communities 237
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