Venture Deals : Be Smarter Than Your Lawyer and Venture Capitalist

by Feld, Brad; Mendelson, Jason; Costolo, Dick

• ISBN13: 9780470929827
• ISBN10: 0470929820
• Edition: 1st
• Format: Hardcover
• Copyright: 2011-08-02
• Publisher: Wiley

Summary

An engaging guide to excelling in todays 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, theyve 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, youll discover what it takes to make your way through it.

Author Biography

Brad Feld 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

Foreword	p. xi
Preface	p. xiii
Acknowledgments	p. xix
Introduction: The Art of the Term Sheet	p. 1
The Players	p. 5
The Entrepreneur	p. 5
The Venture Capitalist	p. 5
The Angel Investor	p. 8
The Syndicate	p. 10
The Lawyer	p. 11
The Mentor	p. 13
How to Raise Money	p. 15
Do or Do Not; There Is No Try	p. 15
Determine How Much You Are Raising	p. 16
Fund-Raising Materials	p. 17
Due Diligence Materials	p. 23
Finding the Right VC	p. 23
Finding a Lead VC	p. 25
How VCs Decide to Invest	p. 26
Closing the Deal	p. 28
Overview of the Term Sheet	p. 31
The Key Concepts: Economics and Control	p. 32
Economic Terms of the Term Sheet	p. 35
Price	p. 35
Liquidation Preference	p. 41
Pay-to-Play	p. 47
Vesting	p. 50
Employee Pool	p. 54
Antidilution	p. 55
Control Terms of the Term Sheet	p. 61
Board of Directors	p. 61
Protective Provisions	p. 63
Drag-Along Agreement	p. 68
Conversion	p. 70
Other Terms of the Term Sheet	p. 73
Dividends	p. 73
Redemption Rights	p. 75
Conditions Precedent to Financing	p. 77
Information Rights	p. 79
Registration Rights	p. 80
Right of First Refusal	p. 83
Voting Rights	p. 84
Restriction on Sales	p. 85
Proprietary Information and Inventions Agreement	p. 86
Co-Sale Agreement	p. 87
Founders' Activities	p. 88
Initial Public Offering Shares Purchase	p. 89
No-Shop Agreement	p. 90
Indemnification	p. 93
Assignment	p. 93
The Capitalization Table	p. 95
How Venture Capital Funds Work	p. 99
Overview of a Typical Structure	p. 99
How Firms Raise Money	p. 101
How Venture Capitalists Make Money	p. 102
How Time Impacts Fund Activity	p. 106
Reserves	p. 108
Cash Flow	p. 110
Cross-Fund Investing	p. 111
Departing Partners	p. 111
Fiduciary Duties	p. 112
Implications for the Entrepreneur	p. 112
Negotiation Tactics	p. 113
What Really Matters?	p. 113
Preparing for the Negotiation	p. 114
A Brief Introduction to Game Theory	p. 116
Negotiating in the Game of Financings	p. 118
Negotiating Styles and Approaches	p. 120
Collaborative Negotiation versus Walk-Away Threats	p. 123
Building Leverage and Getting to Yes	p. 124
Things Not to Do	p. 126
Great Lawyers versus Bad Lawyers versus No Lawyers	p. 129
Can You Make a Bad Deal Better?	p. 129
Raising Money the Right Way	p. 133
Don't Ask for a Nondisclosure Agreement	p. 133
Don't Email Carpet Bomb VCs	p. 134
No Often Means No	p. 134
Don't Ask for a Referral If You Get a No	p. 134
Don't Be a Solo Founder	p. 135
Don't Overemphasize Patents	p. 136
Issues at Different Financing Stages	p. 137
Seed Deals	p. 137
Early Stage	p. 138
Mid and Late Stages	p. 138
Other Approaches to Early Stage Deals	p. 139
Letters of Intent-The Other Term Sheet	p. 145
Structure of a Deal	p. 146
Asset Deal versus Stock Deal	p. 149
Form of Consideration	p. 151
Assumption of Stock Options	p. 152
Representations, Warranties, and Indemnification	p. 155
Escrow	p. 157
Confidentiality/Nondisclosure Agreement	p. 158
Employee Matters	p. 159
Conditions to Close	p. 160
The No-Shop Clause	p. 161
Fees, Fees, and More Fees	p. 162
Registration Rights	p. 163
Shareholder Representatives	p. 164
Legal Things Every Entrepreneur Should Know	p. 167
Intellectual Property	p. 167
Employment Issues	p. 169
State of Incorporation	p. 170
Accredited Investors	p. 170
Filing an 83(b) Election	p. 171
Section 409A Valuations	p. 172
Authors' Note	p. 175
Sample Term Sheet	p. 177
Sample Letter of Intent	p. 197
Glossary	p. 205
About the Authors	p. 213
Index	p. 215
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