Venture Deals

Foreword by Fred Wilson (3rd Edition) xi Foreword by James Park (3rd Edition) xiii Foreword by Dick Costolo (1st and 2nd Editions) xv Preface xvii Acknowledgments xxiii Introduction: The Art of the Term Sheet 1 Chapter 1 The Players 3 The Entrepreneur 3 The Venture Capitalist 4 Financing Round Nomenclature 7 Types of Venture Capital Firms 9 The Angel Investor 10 The Syndicate 12 The Lawyer 13 The Accountant 14 The Banker 15 The Mentor 15 Chapter 2 Preparing for Fundraising 17 Choosing the Right Lawyer 17 Proactive versus Reactive 18 Intellectual Property 20 Chapter 3 How to Raise Money 23 “Do. Or Do Not. There is No Try.” 23 Determine How Much You are Raising 24 Fundraising Materials 26 Due Diligence Materials 32 Finding the Right VC 33 Finding a Lead VC 34 How VCs Decide to Invest 35 Using Multiple VCs to Create Competition 38 Closing the Deal 39 Chapter 4 Overview of the Term Sheet 41 The Key Concepts: Economics and Control 42 Chapter 5 Economic Terms of the Term Sheet 45 Valuation and Price 45 Employee Option Pool 47 Warrants 50 How Valuation is Determined 52 Liquidation Preference 54 Pay-to-Play 63 Vesting 66 Exercise Period 70 Antidilution 71 Chapter 6 Control Terms of the Term Sheet 77 Board of Directors 77 Protective Provisions 81 Drag-Along Agreement 85 Conversion 88 Chapter 7 Other Terms of the Term Sheet 91 Dividends 91 Redemption Rights 93 Conditions Precedent to Financing 95 Information Rights 97 Registration Rights 98 Right of First Refusal 100 Voting Rights 102 Restriction on Sales 102 Proprietary Information and Inventions Agreement 103 Co-Sale Agreement 104 Founders’ Activities 105 Initial Public Offering Shares Purchase 106 No-Shop Agreement 107 Indemnification 110 Assignment 110 Chapter 8 Convertible Debt 113 Arguments for and Against Convertible Debt 114 The Discount 116 Valuation Caps 117 Interest Rate 119 Conversion Mechanics 119 Conversion in a Sale of the Company 121 Warrants 122 Other Terms 125 Early Stage versus Late Stage Dynamics 125 Can Convertible Debt Be Dangerous? 126 An Alternative to Convertible Debt 127 Chapter 9 The Capitalization Table 129 Price per Share with Convertible Notes 131 Pre-Money Method 132 Percentage-Ownership Method 133 Dollars-Invested Method 133 Chapter 10 Crowdfunding 137 Product Crowdfunding 137 Equity Crowdfunding 139 How Equity Crowdfunding Differs 141 Token Crowdfunding 143 Chapter 11 Venture Debt 145 The Role of Debt versus Equity 145 The Players 147 How Lenders Think about Loan Types 148 Economic Terms 151 Amortization Terms 154 Control Terms 157 Negotiation Tactics 161 Restructuring the Deal 163 Chapter 12 How Venture Capital Funds Work 167 Overview of a Typical Structure 168 How Firms Raise Money 169 How Venture Capitalists Make Money 171 How Time Impacts Fund Activity 175 Reserves 177 Cash Flow 179 Cross-Fund Investing 179 Departing Partners 181 Corporate Venture Capital 181 Strategic Investors 183 Fiduciary Duties 184 Implications for the Entrepreneur 185 Chapter 13 Negotiation Tactics 187 What Really Matters? 187 Preparing for the Negotiation 188 A Brief Introduction to Game Theory 191 Negotiating in the Game of Financings 193 Negotiating Other Games 194 Negotiating Styles and Approaches 195 Collaborative Negotiation versus Walk-Away Threats 199 Building Leverage and Getting to Yes 200 Things Not to Do 203 Great Lawyers versus Bad Lawyers versus No Lawyers 205 Can You Make a Bad Deal Better? 206 Chapter 14 Raising Money the Right Way 209 Don’t Be a Machine 209 Don’t Ask for a Nondisclosure Agreement 210 Don’t Email Carpet-Bomb VCs 210 No Often Means No 211 Don’t Ask for a Referral If You Get a No 211 Don’t Be a Solo Founder 212 Don’t Overemphasize Patents 213 Don’t Be Silent If You Witness Bad Behavior 213 Chapter 15 Issues at Different Financing Stages 215 Seed Deals 215 Early Stage 216 Mid and Late Stages 217 Chapter 16 Letters of Intent: The Other Term Sheet 221 Structure of a Deal 222 Asset Deal versus Stock Deal 225 Form of Consideration 227 Assumption of Stock Options 228 Representations, Warranties, and Indemnification 232 Escrow 233 Confidentiality/Nondisclosure Agreement 235 Employee Matters 236 Conditions to Close 237 The No-Shop Clause 238 Fees, Fees, and More Fees 239 Registration Rights 240 Shareholder Representatives 241 Chapter 17 How to Engage an Investment Banker 243 Why Hire an Investment Banker? 243 How to Choose an M&A Adviser 245 Negotiating the Engagement Letter 247 Helping Your Banker Maximize the Outcome 251 Chapter 18 Why Do Term Sheets Even Exist? 253 Constraining Behavior and the Alignment of Incentives 254 Transaction Costs 255 Agency Costs and Information Asymmetry 256 Reputation Constraints 257 Chapter 19 Legal Things Every Entrepreneur Should Know 259 Intellectual Property 259 Patents 261 Trademarks 262 Employment Issues 263 Type of Corporate Structure 264 Accredited Investors 265 Section 409A Valuations 266 (83)b Elections 267 Founders’ Stock 268 Consultants versus Employees 269 Compensating Service Providers 270 Authors’ Note 273 Appendix A: Sample Term Sheet 275 Appendix B: Foundry Group Term Sheet 285 Appendix C: Sample Letter of Intent 295 Appendix D: Additional Resources 303 Glossary 307 About the Authors 321 Index 323 Excerpt from Startup Communities 333