Venture DealsBe Smarter Than Your Lawyer and Venture Capitalist
<p><b>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</b></p> <p>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 <i>Venture Deals</i> 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.</p> <p>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.</p> <ul> <li>Provides valuable, real-world insights into venture capital structure and strategy</li> <li>Explains and clarifies the VC term sheet and other misunderstood aspects of capital funding</li> <li>Helps to build collaborative and supportive relationships between entrepreneurs and investors</li> <li>Draws from the author’s years of practical experience in the VC arena</li> <li>Includes extensively revised and updated content throughout to increase readability and currency</li> </ul> <p><i>Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist</i> 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.</p>
<p>Foreword by <i>Fred Wilson</i> (3rd Edition) xi</p> <p>Foreword by <i>James Park</i> (3rd Edition) xiii</p> <p>Foreword by <i>Dick Costolo</i> (1st and 2nd Editions) xv</p> <p>Preface xvii</p> <p>Acknowledgments xxiii</p> <p>Introduction: The Art of the Term Sheet 1</p> <p><b>Chapter 1 The Players 3</b></p> <p>The Entrepreneur 3</p> <p>The Venture Capitalist 4</p> <p>Financing Round Nomenclature 7</p> <p>Types of Venture Capital Firms 9</p> <p>The Angel Investor 10</p> <p>The Syndicate 12</p> <p>The Lawyer 13</p> <p>The Accountant 14</p> <p>The Banker 15</p> <p>The Mentor 15</p> <p><b>Chapter 2 Preparing for Fundraising 17</b></p> <p>Choosing the Right Lawyer 17</p> <p>Proactive versus Reactive 18</p> <p>Intellectual Property 20</p> <p><b>Chapter 3 How to Raise Money 23</b></p> <p>“Do. Or Do Not. There is No Try.” 23</p> <p>Determine How Much You are Raising 24</p> <p>Fundraising Materials 26</p> <p>Due Diligence Materials 32</p> <p>Finding the Right VC 33</p> <p>Finding a Lead VC 34</p> <p>How VCs Decide to Invest 35</p> <p>Using Multiple VCs to Create Competition 38</p> <p>Closing the Deal 39</p> <p><b>Chapter 4 Overview of the Term Sheet 41</b></p> <p>The Key Concepts: Economics and Control 42</p> <p><b>Chapter 5 Economic Terms of the Term Sheet 45</b></p> <p>Valuation and Price 45</p> <p>Employee Option Pool 47</p> <p>Warrants 50</p> <p>How Valuation is Determined 52</p> <p>Liquidation Preference 54</p> <p>Pay-to-Play 63</p> <p>Vesting 66</p> <p>Exercise Period 70</p> <p>Antidilution 71</p> <p><b>Chapter 6 Control Terms of the Term Sheet 77</b></p> <p>Board of Directors 77</p> <p>Protective Provisions 81</p> <p>Drag-Along Agreement 85</p> <p>Conversion 88</p> <p><b>Chapter 7 Other Terms of the Term Sheet 91</b></p> <p>Dividends 91</p> <p>Redemption Rights 93</p> <p>Conditions Precedent to Financing 95</p> <p>Information Rights 97</p> <p>Registration Rights 98</p> <p>Right of First Refusal 100</p> <p>Voting Rights 102</p> <p>Restriction on Sales 102</p> <p>Proprietary Information and Inventions Agreement 103</p> <p>Co-Sale Agreement 104</p> <p>Founders’ Activities 105</p> <p>Initial Public Offering Shares Purchase 106</p> <p>No-Shop Agreement 107</p> <p>Indemnification 110</p> <p>Assignment 110</p> <p><b>Chapter 8 Convertible Debt 113</b></p> <p>Arguments for and Against Convertible Debt 114</p> <p>The Discount 116</p> <p>Valuation Caps 117</p> <p>Interest Rate 119</p> <p>Conversion Mechanics 119</p> <p>Conversion in a Sale of the Company 121</p> <p>Warrants 122</p> <p>Other Terms 125</p> <p>Early Stage versus Late Stage Dynamics 125</p> <p>Can Convertible Debt Be Dangerous? 126</p> <p>An Alternative to Convertible Debt 127</p> <p><b>Chapter 9 The Capitalization Table 129</b></p> <p>Price per Share with Convertible Notes 131</p> <p>Pre-Money Method 132</p> <p>Percentage-Ownership Method 133</p> <p>Dollars-Invested Method 133</p> <p><b>Chapter 10 Crowdfunding 137</b></p> <p>Product Crowdfunding 137</p> <p>Equity Crowdfunding 139</p> <p>How Equity Crowdfunding Differs 141</p> <p>Token Crowdfunding 143</p> <p><b>Chapter 11 Venture Debt 145</b></p> <p>The Role of Debt versus Equity 145</p> <p>The Players 147</p> <p>How Lenders Think about Loan Types 148</p> <p>Economic Terms 151</p> <p>Amortization Terms 154</p> <p>Control Terms 157</p> <p>Negotiation Tactics 161</p> <p>Restructuring the Deal 163</p> <p><b>Chapter 12 How Venture Capital Funds Work 167</b></p> <p>Overview of a Typical Structure 168</p> <p>How Firms Raise Money 169</p> <p>How Venture Capitalists Make Money 171</p> <p>How Time Impacts Fund Activity 175</p> <p>Reserves 177</p> <p>Cash Flow 179</p> <p>Cross-Fund Investing 179</p> <p>Departing Partners 181</p> <p>Corporate Venture Capital 181</p> <p>Strategic Investors 183</p> <p>Fiduciary Duties 184</p> <p>Implications for the Entrepreneur 185</p> <p><b>Chapter 13 Negotiation Tactics 187</b></p> <p>What Really Matters? 187</p> <p>Preparing for the Negotiation 188</p> <p>A Brief Introduction to Game Theory 191</p> <p>Negotiating in the Game of Financings 193</p> <p>Negotiating Other Games 194</p> <p>Negotiating Styles and Approaches 195</p> <p>Collaborative Negotiation versus Walk-Away Threats 199</p> <p>Building Leverage and Getting to Yes 200</p> <p>Things Not to Do 203</p> <p>Great Lawyers versus Bad Lawyers versus No Lawyers 205</p> <p>Can You Make a Bad Deal Better? 206</p> <p>Chapter 14 Raising Money the Right Way 209</p> <p>Don’t Be a Machine 209</p> <p>Don’t Ask for a Nondisclosure Agreement 210</p> <p>Don’t Email Carpet-Bomb VCs 210</p> <p>No Often Means No 211</p> <p>Don’t Ask for a Referral If You Get a No 211</p> <p>Don’t Be a Solo Founder 212</p> <p>Don’t Overemphasize Patents 213</p> <p>Don’t Be Silent If You Witness Bad Behavior 213</p> <p>Chapter 15 Issues at Different Financing Stages 215</p> <p>Seed Deals 215</p> <p>Early Stage 216</p> <p>Mid and Late Stages 217</p> <p><b>Chapter 16 Letters of Intent: The Other Term Sheet 221</b></p> <p>Structure of a Deal 222</p> <p>Asset Deal versus Stock Deal 225</p> <p>Form of Consideration 227</p> <p>Assumption of Stock Options 228</p> <p>Representations, Warranties, and Indemnification 232</p> <p>Escrow 233</p> <p>Confidentiality/Nondisclosure Agreement 235</p> <p>Employee Matters 236</p> <p>Conditions to Close 237</p> <p>The No-Shop Clause 238</p> <p>Fees, Fees, and More Fees 239</p> <p>Registration Rights 240</p> <p>Shareholder Representatives 241</p> <p><b>Chapter 17 How to Engage an Investment Banker 243</b></p> <p>Why Hire an Investment Banker? 243</p> <p>How to Choose an M&A Adviser 245</p> <p>Negotiating the Engagement Letter 247</p> <p>Helping Your Banker Maximize the Outcome 251</p> <p><b>Chapter 18 Why Do Term Sheets Even Exist? 253</b></p> <p>Constraining Behavior and the Alignment of Incentives 254</p> <p>Transaction Costs 255</p> <p>Agency Costs and Information Asymmetry 256</p> <p>Reputation Constraints 257</p> <p><b>Chapter 19 Legal Things Every Entrepreneur Should Know 259</b></p> <p>Intellectual Property 259</p> <p>Patents 261</p> <p>Trademarks 262</p> <p>Employment Issues 263</p> <p>Type of Corporate Structure 264</p> <p>Accredited Investors 265</p> <p>Section 409A Valuations 266</p> <p>(83)b Elections 267</p> <p>Founders’ Stock 268</p> <p>Consultants versus Employees 269</p> <p>Compensating Service Providers 270</p> <p>Authors’ Note 273</p> <p>Appendix A: Sample Term Sheet 275</p> <p>Appendix B: Foundry Group Term Sheet 285</p> <p>Appendix C: Sample Letter of Intent 295</p> <p>Appendix D: Additional Resources 303</p> <p>Glossary 307</p> <p>About the Authors 321</p> <p>Index 323</p> <p>Excerpt from <i>Startup Communities </i>333</p>
<p><b>BRAD FELD</b> has been an early stage investor and entrepreneur for over thirty years. Prior to cofounding Foundry Group, he cofounded Mobius Venture Capital and Intensity Ventures. He is also a cofounder of Techstars. <p><b>JASON MENDELSON</b> has over twenty years experience in the venture capital and technology industries in a multitude of investing, legal, and operational roles. Prior to cofounding Foundry Group, Jason was a Managing Director and General Counsel for Mobius Venture Capital. He is also a cofounder of SRS/Acquiom.
<p>There has never been a better time for entrepreneurs to create a startup. With decreasing costs of getting started and operating a business, the ability to be a founder has become increasingly democratized across the globe. On top of this, the amount of funding sources has dramatically increased not only in number, but also in types, as non-traditional sources like crowdfunding and accelerators have become important players in the ecosystem. Today, an entrepreneur raising money has a lot more options than even just a few years ago. The question becomes "how does one evaluate these opportunities and maximize the result?" <p>Brad Feld and Jason Mendelson are back with version four of their <i>Wall Street Journal</i> and Amazon bestseller. Packed with the latest insights and emerging trends, the authors' fifty-plus years of collective experience are at your fingertips. Whether you need advice on raising money, negotiating a term sheet, selling your business, or really just want to have insider access into what makes venture capitalists tick, this book is for you. <p>Brad and Jason discuss different stages of financings, the many types of different investors who might fund your company, as well as the different avenues of funding, whether they be equity, traditional convertible debt, venture bank debt, or one of the newer practices of crowdfunding and pre-sales. <p>Whether you are a new or seasoned entrepreneur, lawyer, venture capitalist, educator, or student of the industry, <i>Venture Deals, Fourth Edition</i> is the go-to-guide to navigating the venture landscape. <p>For additional information, including term sheets and all the documents generated from the term sheet as part of venture financing, visit the authors' website at venturedeals.com.
<p>Praise For <b><i>venture deals </i></b> <p>"Every venture capitalist believes they know how to do venture deals. Jason and Brad, however, actually have deep knowledge and insight and are willing to share the details of how to get deals done right. While this book may not actually make you smarter than your lawyer (assuming you have a good one), it is an essential read for entrepreneurs, lawyers, and venture capitalists who want to be successful in a critical part of building a great company: raising money."</br> <b> —Eric Jensen,</b> Partner, Cooley LLP <p>"One of the greatest lessons for entrepreneurs is to learn from others and take advice from trusted partners and experts. In <i>Venture Deals,</i> Jason and Brad offer entrepreneurs the gift of their experience and expertise over many years and hundreds of deals. Take it and run with it. What you will learn in this book will serve you well in every investment, legal, and banking conversation throughout your life as an entrepreneur. Your ideas and your passion will get you far, and having an insider's understanding of how to fund your ambitious goals will get you there that much faster."</br> <b> —Greg Becker,</b> CEO, Silicon Valley Bank <p>"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!"</br> <b> —Heidi Roizen,</b> Partner, DFJ <p>"Feld and Mendelson pack a graduate-level course into this energetic and accessible book. The authors' frank style and incisive insight make this a required 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."</br> <b> —Brad Bernthal,</b> CU Boulder, Associate Professor of Law, Technology Policy, Entrepreneurial Law <p>"I've been lucky to have Brad and Jason as mentors on my journey from entrepreneur, to running Techstars Boston, to serving as the first investor to over 100 startups, and now as CEO of The Engine Fund. I give this book to all founders I back. <i>Venture Deals</i> is a fundamental resource for both entrepreneurs and venture capitalists."</br> <b> —Katie Rae,</b> CEO and Managing Partner, The Engine
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