Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist, 4th Edition

Foreword
Fred Wilson

Foreword
Dick Costolo

Foreword
James Park

Preface

Acknowledgments

Introduction: The Art of the Term Sheet

Chapter 1: The Players

The Entrepreneur

The Venture Capitalist

Financing Round Nomenclature

Types of Venture Capital Firms

The Angel Investor

The Syndicate

The Lawyer

The Accountant

The Banker

The Mentor

Chapter 2: Preparing for Fundraising

Choosing the Right Lawyer

Proactive Versus Reactive

Intellectual Property

Chapter 3: How to Raise Money

Do or Do Not—There Is No Try

Determine How Much You Are Raising

Fundraising Materials

Due Diligence Materials

Finding the Right VC

Finding a Lead VC

How VCs Decide to Invest

Using Multiple VCs to Create Competition

Closing the Deal

Chapter 4: Overview of the Term Sheet

The Key Concepts: Economics and Control

Chapter 5: Economic Terms of the Term Sheet

Valuation and Price

Employee Option Pool

Warrants

How Valuation Is Determined

Liquidation Preference

Pay-to-Play

Vesting

Exercise Period

Antidilution

Chapter 6: Control Terms of the Term Sheet

Board of Directors

Protective Provisions

Drag-Along Agreement

Conversion

Chapter 7: Other Terms of the Term Sheet

Dividends

Redemption Rights

Conditions Precedent to Financing

Information Rights

Registration Rights

Right of First Refusal

Voting Rights

Restriction on Sales

Proprietary Information and Inventions Agreement

Co-Sale Agreement

Founders’ Activities

Initial Public Offering Shares Purchase

No-Shop Agreement

Indemnification

Assignment

Chapter 8: Convertible Debt

Arguments for and Against Convertible Debt

The Discount

Valuation Caps

Interest Rate

Conversion Mechanics

Conversion in a Sale of the Company

Warrants

Other Terms

Early-Stage versus Late-Stage Dynamics

Can Convertible Debt Be Dangerous?

An Alternative to Convertible Debt

Chapter 9: The Capitalization Table

Price Per Share with Convertible Notes

Pre-Money Method

Percentage-Ownership Method

Dollars-Invested Method

Chapter 10: Crowdfunding

Product Crowdfunding

Equity Crowdfunding

How Equity Crowdfunding Differs

Token Crowdfunding

Chapter 11: Venture Debt

The Role of Debt versus. Equity

The Players

How Lenders Think about Loan Types

Economic Terms

Amortization Terms

Control Terms

Negotiation Tactics

Restructuring the Deal

Chapter 12: How Venture Capital Funds Work

Overview of a Typical Structure

How Firms Raise Money

How Venture Capitalists Make Money

How Time Impacts Fund Activity

Reserves

Cash Flow

Cross-Fund Investing

Departing Partners

Corporate Venture Capital

Strategic Investors

Fiduciary Duties

Implications for the Entrepreneur

Chapter 13: Negotiation Tactics 

What Really Matters?

Preparing for the Negotiation

A Brief Introduction to Game Theory

Negotiating in the Game of Financings

Negotiations Other Games

Negotiating Styles and Approaches

Collaborative Negotiation versus Walk-Away Threats

Building Leverage and Getting to Yes

Things Not to Do

Great Lawyers versus Bad Lawyers versus No Lawyers

Can You Make a Bad Deal Better?

Chapter 14: Raising Money the Right Way

Don’t Be a Machine

Don’t Ask for a Nondisclosure Agreement

Don’t Email Carpet Bomb VCs

No Often Means No

Don’t Ask for a Referral if You Get a No

Don’t Be a Solo Founder

Don’t Overemphasize Patents

Don’t Be Silent if You Witness Bad Behavior

Chapter 15: Issues at Different Financing Stages

Seed Deals

Early Stage

Mid and Late Stages

Chapter 16: Letters of Intent—The Other Term Sheet

Structure of a Deal

Asset Deal versus Stock Deal

Form of Consideration

Assumption of Stock Options

Representations, Warranties, and Indemnification

Escrow

Confidentiality/Nondisclosure Agreement

Employee Matters

Conditions to Close

The No-Shop Clause

Fees, Fees, and More Fees

Registration Rights

Shareholder Representatives

Chapter 17: How to Engage an Investment Banker

Why Hire an Investment Banker?

How to Choose an M&A Advisor

Negotiating the Engagement Letter

Helping Your Banker Maximize the Outcome

Chapter 18: Why Do Term Sheets Even Exist?

Constraining Behavior and the Alignment of Incentives

Transaction Costs

Agency Costs and Information Asymmetry

Reputation Constraints

Chapter 19: Legal Things Every Entrepreneur Should Know

Intellectual Property

Employment Issues

State of Incorporation

Type of Corporate Structure

Accredited Investors

Section 409A Valuations

(83)b Elections

Founders’ Stock

Consultants versus Employees

Compensating Service Providers

Trademarks

Patents

Author’s Note

Appendix A: Sample Term Sheet

Appendix B: Foundry Group Term Sheet

Appendix C: Sample Letter of Intent

Appendix D: Additional Resources

Glossary

About the Authors

Index

Excerpt from Startup Communities

BRAD FELD 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.

JASON MENDELSON 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.