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
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 Venture Deals 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.
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.
Provides valuable, real-world insights into venture capital structure and strategy Explains and clarifies the VC term sheet and other misunderstood aspects of capital funding Helps to build collaborative and supportive relationships between entrepreneurs and investors Draws from the author's years of practical experience in the VC arena Includes extensively revised and updated content throughout to increase readability and currency Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist 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.
Brad has been an early stage investor and entrepreneur since 1987. Prior to co-founding Foundry Group, he co-founded Mobius Venture Capital and, prior to that, founded Intensity Ventures. Brad is also a co-founder of Techstars.
Brad is a writer and speaker on the topics of venture capital investing and entrepreneurship. He’s written a number of books as part of the Startup Revolution series and writes the blogs Feld Thoughts and Venture Deals.
Brad holds Bachelor of Science and Master of Science degrees in Management Science from the Massachusetts Institute of Technology. Brad is also an art collector and long-distance runner. He has completed 25 marathons as part of his mission to finish a marathon in each of the 50 states.
This is the second time in my life I find myself doing the rounds to collect proper money from investors. First time, more than fifteen years ago, I used the Bagley and Dauchy classic “Entrepreneur’s Guide to Business Law” and I thought it was pretty good. This book is quite simply in a different league.
The authors, seasoned VC entrepreneurs, have a gift for writing and that’s what carries you through the book. It’s all very serious, of course, but the writing style is as far from dry as you can imagine.
So I’m reading this and the only thing that keeps me from saying “OK, boys and girls, this covers everything, it’s the gospel” is the simple fact that if I was a VC I’d write a book that makes the case for the VC’s interests rather than the entrepreneur’s. So from where I stand, and I’m an entrepreneur, I’d want an entrepreneur to have written the book.
The authors actually go a long way toward addressing this concern: the summary for every section has actually been written by entrepreneur Matt Blumberg and rather often it’s hardly a summary; it emphasizes different point from Brad Feld’s, lending credibility to the book and making the reader more comfortable.
So this is basically a tremendous book and if you’re raising money you need to buy it and read it. If for some mysterious reason you don’t want a preview, on the other hand, look away now, because what follows is my summary of the key points:
Chapter 1: “The Players” • You need to be talking to a Managing Director or a General Partner • You need a good, experienced lawyer: this is an awful place to skimp • Mentors are great
Chapter 2: “How to Raise Money” • You need an elevator pitch, an executive summary and a 10-slide powerpoint presentation • “We haven’t seen a business plan in more than 20 years” • Your financial model must get the potential expenses right; forget about nailing the revenues • Do your homework on your VC and don’t press any clearly advertised wrong buttons • If you feel like your VC is a proctologist, run for the hills • Ask your VC for references from entrepreneurs
Chapter 3: “Overview of the Term Sheet: • It’s not a letter of intent; it’s a blueprint for your future relationship with your VC • Two things matter: economics and control
Chapter 4: “Economic Terms of the Term Sheet” • Understand the difference between pre-money and post-money • The VC will try to stick the options pool in the pre-money valuation • You must have a Plan B to be able to negotiate good economic terms • Competition aside, valuation will depend on the stage of the company, the team’s experience, the numbers, the suitability for the VC and the economic environment • Liquidation Preference arises because VCs come in with preferred stock and means the VC gets its money first. This can be very dilutive if the next round is a down round. • Fully Participating stock receives its participation amount and then shares in the liquidation process on an as-converted basis • A cap can be put on the participation • Under “pay to play” provisions, investors who do not participate in the next round get converted to common stock. • Typically, employee stocks and options will vest over four years and disappear if somebody leaves • Consideration must be given to treating the vesting as clawback with an IRS Section 83(b) election • Acceleration of vesting upon change of control is a key feature, don’t leave it out! • Antidilution provisions may be requested by the investor for the case where new common stock is created after the financing
Chapter 5: “Control Terms of the Term Sheet” • At the beginning it will be 1. Founder, 2. CEO, 3. VC, 4. 2nd VC, 5. outside board member • Don’t allow observers on your board • Make sure the Protective Provisions allow you to borrow a reasonable amount of money • Your investors need to vote as a single class • There will be a drag-along provision (majority of shares on as-converted basis is the law in Delaware) • There will be a conversion clause (so VCs can vote alongside common stock when they must) • An automatic conversion clause can be there to force VCs to give up on their preferred ahead of a sale. • If there is an automatic conversion threshold, it must be the same for all classes of stock.
Chapter 6: “Other Terms of the Term Sheet” • Dividends might be requested by dorky VCs with Private Equity background. • Noncumulative dividends that require board approval are OK. Supermajority even better. • Redemption rights on the preferred (say after 5 years) can be put in by VCs that have the maturity of their fund in mind. • Adverse Change Redemption Rights are evil, because there is no good definition for adverse change. • Conditions Precedent to Financing should be avoided at all costs. • Information Rights are A-OK. • Registration Rights are A-OK. The world is good if you’re going public. • Right of First Refusal had better be restricted to big investors. • Right of First Refusal had better be pro-rata. • Restriction on Sales is a clause that allows the company itself the right of first refusal. • The Proprietary Information and Inventions Agreement is a clause you actually need. • A Co-Sale Agreement allows investors to sell along with founders. • A No-Shop Agreement had better expire automatically if the sale falls through and should have a carve-out for acquisitions. • A standard Indemnification clause is good corporate hygiene, but it means you need to buy directors’ insurance. • The Assignment clause needs to be read carefully: look for the loophole “assignment without transfer or the obligation under the agreements” which should not be there.
Chapter 8: “Convertible Debt” • Convertible converts at a discount to the next financing. • The purpose is to defer the discussion about the value of the company. • A floor on the value of the stock protects the entrepreneur. • A ceiling protects the investor, but can hurt everybody because it guides (caps!) the next investors on price. • You should put a reasonable time horizon on an equity financing as a condition, or you will find the debt converted before you had time to do the financing. • You should set upfront the minimum amount of financing that triggers the conversion. • The interest rate on the debt should be as low as possible. • There must be clauses regarding the sale of the firm while the debt is outstanding. • Technically, a startup with convertible debt is insolvent!!! • Warrants attached to debt are an alternative to the discount on convertible debt. • Warrants should deliver the most recent class of stock at the most recent round’s price. • Warrants are long-term (e.g. 10 year) call options. • Warrants had better expire at a merger/acquisition unless they are exercised prior to the merger.
Chapter 9: “How Venture Capital Funds Work” • Fees received from the LP are higher during the “Commitment Period” during which funds can still be committed to new investments. • Follow-on investments can still be made during the investment term of the fund. • VCs recycle their management fee into the LP if returns during the early life of the fund are good. • If a fund is approaching the end of its life, you don’t want them to invest in you and most probably they can’t anyway. • Ask your VC when they made their last investment. If it was more than 12 months ago, run for the hills.
Chapter 10: “Negotiation Tactics” • Get a good result, do not kill your personal relationships and understand the deal you struck. • This deal is not your lawyer’s. • Find out who you are dealing with. • Have a solid Plan B. • Get the VC to tell you the top 3 things he wants (erm, good luck with that, I say) • Always be transparent. • Never make an offer first. • Understand what market terms are. • Bear a bad deal, because the acquirer might deliver you from it.
Chapter 11: “Raising Money the Right Way” • Don’t ask for an NDA. • Don’t carpet bomb VCs. • No means no. • Don’t be a solo founder. • Don’t overemphasize patents.
Chapter 13: “Letters of Intent – The Other Term Sheet” • (N.B. that means you’re selling the firm) • They will beef up the options plan, right out of the offer they’ve shown you. • An asset deal is crap: you have no assets but must still close the firm down. • If they are offering illiquid stock, that’s something you’ll need to invest the time to evaluate yourself! • You will have to give representations and warranties and if they are qualified by “to the extent currently known” you will have to sign them. • Escrow is the practice whereby part of the offer is put to one side until some conditions have been met. This is a big burden, especially if the consideration is in stock. Fight it as much as possible. • No-shop clauses should expire the moment the buyer terminates the process. • Don’t negotiate your deal at the beginning (that looks awful) but don’t leave it last either.
Chapter 14: “Legal Things Every Entrepreneur Should Know” • IP issues can kill a startup before you even really begin. • Delaware • Non-accredited investors have a right of rescission! • Don’t forget to file an 83(b) Election • When you write options to your employees, get them 409A - valuated
This book was OK and potentially very useful for anyone working through a term sheet when seeking venture capital. In that particular circumstance, I think that it is indeed a wonderful explanation of various factors. In fact, that is what the book set out to be. However, there was very limited real-world examples that gave a context for understanding the particular point being discussed. The subject is definitely difficult to speak about because of all of the legal protections and regulations regarding discussing information related to specific VC deals. Yet, it is the ability to navigate these regulations and still weave a compelling story that sets good writers apart from poor ones. In the end, I did not feel that I learned too much from the book because the writing was simply not up to the level that it should have been. It is a sort of legal commentary rather than helpful advice that can be easily digested by a non-lawyer. In a sense, they could have written a 30 page pamphlet and stated: "After all of our experience in the VC industry we have realized one thing, it is important to have a good lawyer who understands the particularities of VC firms and deals." After reading this book, I can honestly say that I don't think that it would made me feel any more comfortable in interactions with VC firms or angel investors.
This is one of those books that I wish I had read before forming our business. It is overwhelming to think about all the legal details that go into investment deals and the terminology has been foreign to me. This book cleared up the things I didn’t understand and explained in layman’s terms what these deals really mean, what I as an entrepreneur should worry about and which terms I should not really worry about. This book is now my go-to Bible for the investment deals we will enter as our business grows.
Here are my key takeaways from the book:
Read and understand every contract you sign. If that means the deal takes longer, so be it.
Know what terms are most important to you before you enter into a negotiation.
Don’t be afraid to negotiate.
Remember that these investors are going to be your business partners going forward. You want to have a good relationship with them. Do everything you can to foster that relationship.
Most importantly: hire a good lawyer, that you like and has experience in startup deals.
This book was not intimidating and made me feel so much more knowledgeable about the world I am entering into as an entrepreneur seeking investors. It is a must read for anyone even thinking about founding a business.
If you are a first-time entrepreneur, this book might help you skip rookie mistakes!
Venture Deals is a must-read for any entrepreneur thinking about starting, or currently running, a venture-backed company.
It might take you a bit longer to read (it took me several months which is A LOT higher than the average time it takes me to read a book), that most business books, because of the level of detail you will find. Yet, every detail is valuable because when in need you'll be able to remember where to look for information before making an important decision that could impact the future of your company.
The author does a great job of sharing different perspectives so that you know what to expect in any situation. Nothing beats experience, but this book will definitely put you in a better position when dealing with investors, lawyers, boards, etc. You will be able to make better decisions thanks to this book.
Some of my highlights:
"If you are presented with a weak (or one-sided) confidentiality agreement, it could mean that the acquirer is attempting to learn about your company through the due diligence process and may or may not be intent on closing the deal."
"Creating a successful software business is about having a great idea and executing well, not about patents, in our opinion."
"There are only three things that matter when negotiating a financing: achieving a good and fair result, not killing your personal relationship getting there, and understanding the deal that you are striking."
The previous internship recommends books, and I finally read them! The middle of the term sheet part is quite hard to read and get a clear understanding of, and because I lack practical experience and am also not a startup founder, it is pretty ambiguous for me. However, the other part fits my experience to peep into VC and will have an overall rough understanding of this mysterious industry.
Very helpful guide to all the VC jargon you simply could not know without being taught - very much appreciate the accessibility of language used to explain some heady legal and negotiating concepts. The inclusion of both the VC and entrepreneur’s perspectives was also a very helpful way to make sense of each chapter. Will definitely be referencing this book again in future deals!
I got a chance to read this book through the course provided by the authors last two months. The book is organized and informative, and this is the first book under this subject. The language used is not simple for all and the reader to be aware of some financial and law issues.
A really great book, full of information and clear exemples that uncover lot of things from the unknown about startups and VC world. If you are an entrepreneur, an investor or something in between, you should read the book.
This was an absolutely excellent book! I listened to this 9 hour long book through Amazon's audible. The book teaches how the only two terms that matter are 'economics' and 'control'. I am starting to learn more about the world through an entrepreneur and VC's lens and this book does a good justice off opening up horizons for people who are starting out. I liked the way they gave examples of startups flourished and failed. It also explains which folks within a VC one must connect with to successfully get a deal out of the conversation. Terminologies specific to this world (term sheets, pre money, series A-B-C.....) were explained in an easy to understand manner. The authors were well experienced and this reflected in how the book was pretty concise. I read the 2019 version of the book.
There's nothing comparable to this book in the market. Very specific on term-sheets and other legal advice both entrepreneurs and VCs should know.
The book is somewhat a drag to read as it sometimes goes into legal details, but overall a very, very good book that only those who are working in the industry should read it.
There's plenty of other books about building great companies, valuation, how to divide stock options etc and all that you won't find in this book. But what you find in this book you won't find anywhere else.
Livro sobre as circunstâncias e minúcias envolvendo o financiamento de startups, escrito por dois capitalistas de investimentos de risco. Obra objetiva, bem humorada (recheada de piadas sobre advogados) e que serve de boa orientação aos empreendedores sobre as questões legais, burocráticas e de negociação necessárias para o sucesso de suas empresas. Nem tudo se aplica à realidade econômica e jurídica brasileira. Ainda assim, ‘Venture Deals’ mostra a questão de investimento em startups sob a ótica de quem está do outro lado da mesa – e a capacidade de enxergar o mundo pelas lentes do outro é uma das habilidades mais importantes que um empreendedor possa vir a desenvolver.
One of the best of its kind. The book will be very useful for entrepreneurs, VC and PE professionals. No bullshit. The book is very dense and packed with practical advice on every page. At the same time it’s fun and easy to read. The good chunk of it is focused on the dark art of Term Sheet, which is a central instrument in VC deals. Also a brilliant chapter on negotiations with sober and pragmatic look at the topic. The text is good and thought provoking. Will definitely reread it sometime later.
This book is simply amazing. I honestly expected it to be full of bulshit motivational, full of phrases with no meaning but I was proven wrong.
This is a book that everyone who is about to start a business should read. Then re-read it again anytime when he is raising funds. The structure is simply amazing. It explains every single term in details and examples. And the best part is that is that each chapter ends with a little - "what does this all mean to you - the enterprenour".
О ЧЕМ КНИГА: Авторы - венчурный инвестор и юрист детально разбирают все элементы работы индустрии венчурных инвестиций. В книге даётся взгляд на основные параметры сделок с точки зрения инвестора и предпринимателя. Авторы проделали большую работу и разложили по полочкам всю экосистему венчура. Ценно, что в книге много примеров из личной практики и разбираются конкретные сделки.
ГЛАВНАЯ МЫСЛЬ КНИГИ: Сейчас при инвестировании в венчурные проекты уже не нужно каждый раз заново прорабатывать ключевые условия сделки. Уже есть принятые нормы и стандарты основных условий в term sheet, которые надо просто обсудить и прописать под каждую свою инвестицию.
ЗАЧЕМ ЧИТАТЬ ЭТУ КНИГУ? Чтобы разобраться в основных параметрах и терминах венчурных сделок.
МЫСЛИ И ВЫВОДЫ ИЗ КНИГИ: - Предприниматель и VC оба находятся в о��ной лодке. Поэтому во время переговоров об условиях сделки не будут работать манипулятивные техники и давление на другую сторону. Очень важна открытость и доверие. Ведь нам вместе ещё дальше развивать компанию и привлекать новых инвесторов.
- При обсуждении параметров сделки важны только два основных блока вопросов - экономика проекта и контроль над работой компании.
- Ваш юрист - это ваше отражение.
- Единственное что нужно знать о прогнозировании будущего стартапа - это то, что все прогнозы неправильны.
- Средняя длительность отношений между инвестором и основателем компании равна средней продолжительности брака. Надо быть очень внимательным при выборе партнеров и с той и с другой стороны.
- Оценка бизнеса - это не оценка личности предпринимателя.
- Надо помнить, что VC в сделке отстаивает не свои интересы, а интересы своих LPs.
ЧТО Я БУДУ ПРИМЕНЯТЬ: - Чек-лист ключевых пунктов, которые нужно обсудить и включить в Term Sheet.
ЕЩЕ НА ЭТУ ТЕМУ: 📗 Scott Kupor «Secrets of Sand Hill Road»
An excellent primer on venture capital financings.
The book discusses a lot of the issues relevant for any startup founder - how venture capital deals are structured, what is the relevance and impact of various terms on the term sheet, how to raise money, how to negotiate with VCs, how VC funds work. The explanations are very helpful, and should help any first-time founder. Authors have managed to provide a balanced perspective between the interests of the VC and the entrepreneur.
The book is written in lucid, well-organised prose and is not longer than it should have been.
I have two small issues with the book. Firstly, the section on liquidation preferences could be improved. It is one of the most confusing venture financing issues for people without experience in the field, and I did not feel the book did a good enough job of providing a clear, intuitive explanation (especially for more complicated concepts like stacked preferences). Secondly, the perspective provided by authors is understandably US-centric. It would be great if some experienced European VC could spend some time with the book and prepare "Venture Deals: European Edition" that reflects the European legal framework and practices of local investors.
Every single mentor has suggested we read this book, and we're glad we did. Lots of founders have expertise in engineering, product, marketing, business development, etc.. but few have expertise in VC. This book helps answer so many questions about the VC world and demystifies the fundraising process.
Venture Deals is a tactical read, unlike many fluffy, theory-only business books. This book is incredibly thorough, insightful, and even funny. Read it!
Thank you, Brad and Jason, for putting this excellent resource together!
If you want to raise VC or want to work in the VC industry this book is a must read. I have to admit I did not understand a lot of the terms mentioned here but I guess unless you actually raise a round you won't understand a term sheet fully :)