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Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist Hardcover – December 26, 2012
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From the Inside Flap
Although it hasn't been very long since the first edition of Venture Deals was published, the need for information in this evolving field continues to grow. That's why Brad Feld and Jason Mendelson have returned with the Second Edition of Venture Deals. While staying true to the original edition of this Wall Street Journal bestseller, the Second Edition contains timely updatesas well as new material on topics such as convertible debt financingthat will help you excel at this difficult endeavor.
Some of today's fastest-growing entrepreneurial companies have financed themselves by raising venture capital. Yet few people have a firm grasp of how venture capital deals really come together. Nobody understands this situation better than Brad Feld and Jason Mendelson. For over twenty years, they've been involved in hundreds of venture capital financings, and now, with this practical guide, they continue to share their experiences in this field with you.
Venture Deals, Second Edition opens with an informative overview of the venture capital term sheet and takes the time to discuss the different parties who participate in venture capital transactions as well as how entrepreneurs should go about raising money from a venture capitalist. From here, the book skillfully outlines the essential elements of the venture capital term sheetfrom terms related to economics to those related to control. Feld and Mendelson strive to give a balanced view of the particular terms along with the strategies to getting to a fair deal.
In addition to examining the nuts and bolts of the term sheet, this reliable resource also reveals how VC firms operate, describes how to apply different negotiating tactics to your deals, and introduces you to issues you may face at different stages of financing. You'll also gain valuable insights into several common legal issues most startups face and, as a bonus, discover what a typical letter of intent to acquire your company looks like.
Whether you're an experienced or aspiring entrepreneur, venture capitalist, or lawyer who partakes in these particular types of deals, you will benefit from the insights found throughout the Second Edition of Venture Deals.
For additional information that includes term sheets as well as all of the documents that are generated from the term sheet as part of venturing financing, visit the authors' website www.askthevc.com.
From the Back Cover
Praise for the First Edition of Venture Deals
"My biggest nightmare is taking advantage of an entrepreneur without even realizing it. It happens because VCs are experts in financings and most entrepreneurs are not. Brad and Jason are out to fix that problem with Venture Deals. This book is long overdue and badly needed."
—Fred Wilson, Managing Partner, Union Square Ventures
"Feld and Mendelson pack a graduate-level course into this energetic and accessible book. The authors' frank style and incisive insight make this a must-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. I enthusiastically recommend."
—Brad Bernthal, CU Boulder, Associate Clinical Professor of Law, Technology Policy, Entrepreneurial Law
"A must-read book for entrepreneurs. Brad and Jason demystify the overly complex world of term sheets and M&A, cutting through the legalese and focusing on what really matters. That's a good thing not just for entrepreneurs, but also for venture capitalists, angels, and lawyers. Having an educated entrepreneur on the other side of the table means you spend your time negotiating the important issues and ultimately get to the right deal faster."
—Greg Gottesman, Managing Director, Madrona Venture Group
"Venture Deals is a must-read for any entrepreneur contemplating or currently leading a venture-backed company. Brad and Jason are highly respected investors who shoot straight from the hip and tell it like it is, bringing a level of transparency to a process that is rarely well understood. It's like having a venture capitalist as a best friend who is looking out for your best interests and happy to answer all of your questions."
—Emily Mendell, Vice President of Communications, National Venture Capital Association
"The adventure of starting and growing a company can be exhilarating or excruciating—or both. Feld and Mendelson have done a masterful job of shedding light on what can either become one of the most helpful or dreadful experiences for entrepreneurs—accepting venture capital into their firm. This book takes the lid off the black box and helps entrepreneurs understand the economics and control provisions of working with a venture partner."
—Lesa Mitchell, Vice President, Advancing Innovation, Kauffman Foundation
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I wish I had this book in 2007, when I was trying to raise money. Terms like "double ratchet anti-dilution", "preferred", "participation", "vesting pool' or "liquidation events" were all terms that I was completely ignorant about. worst yet, our attorneys had to explain these to me, and at $750/hr it was a costly lesson. $30 for this book would have saved me $1,000's in legal fees, and hundreds of thousands in earnings.
Well, but now that i have read this book my long-held view about VCs is further perpetuated.
VCs are in the business to accomplish two things: (1) preserve their LP capital (i.e. don't lose money). and (2) earn outsized earning to makeup for all the duds (i.e. take everything you can).
Note, "make the entrepreneur lots of money" is not on the list. This is something that the authors and most VCs, including Mark Suster on his talks/blogs will confirm this. As an entrepreneur you end up working for the VCs and will get wealthy if your company ends up being one of the 0.01% of VC companies that have very successful exits. If your company does just "great", or "OK" then expect to earn nothing from the exit - while the VC will walkaway with 2x to 5x of the investment.
This is not a bad thing if you expect to be in the 0.01%, but as that number indicates - it's not likely.
so lets look at the main two things covered in this book that describe how VCs make money:
VCs get their money from pension funds, alternative asset funds, government organizations, and basically any large sources of capital that is looking for risk-adjusted better-than-average returns. these are the clients of VCs and these are the folks they are accountable to. So if they don't produce the expected returns, or worse yet lose their capital they won't be in business for too long.
To increase the odds of staying in business they do two things:
(a) push the risk to the entrepreneur and all the "common" investors - do you own "common stock" or "preferred stock"? 'nough said.
(b) make the ownership disproportionate to the proceeds of liquidation - meaning, if the ownership is split 50/50 between the founder and the VC then during the sale most of the proceeds (60% to 80%) will go to the VC.
this is done by instruments like "preferred class", "full participation", "anti-dilution" and other similar means that create asymmetry in risk/reword. Just read chapters 4 and 5 of the book if you need to see examples.
BTW: Does this sound familiar? we had a similar situation in the financial crisis of 2008. Banks created asymmetry in the housing market where they held disproportionate amount of the reword while the risk was pushed out to the homeowner and rest of the economy.
So, if as an entrepreneur and you have created a business that is cashflow-positive, and has a great product and market opportunity then think twice about the VC option. There are many other ways to raise money - loans, venture debt, private equity, and good ol' sales...
Granted, this might not be the fastest way to grow your company and presents the risk of being overtaken by a well-funded company. But if you know that the market is big enough for more then one player (even if you're #2), and you want to keep a larger amount of your hard-earned money and reduce the influence of VCs then think twice about the VC option.
But if you think your company is the next Facebook or Google then go for it. However, most founders endup working in "indentured servanthood" to VCs because they end up relinquishing control and ownership of the company while working long hard hours for little pay.
Buy this book. Read it. Explore all your capitalization options. Weigh the costs and benefits. But whatever you decide make sure to focus on creating a kick-a$$ products for a kick-a$$ markets more so then about raising money. If you have a great company money will find you.
Hope this helps your decision process.
I wish I had read it before taking VC money some years ago. This book is more like a practical guide and resource.
Venture Deals is not going to directly help you answer the question whether or not you should take venture capital. But it’s going to help you a lot if you decide to use venture capital to fund your company.
VCs’ obsession in getting preferred terms and stock in early stage financing annoys me tremendously. A company in its early stage needs partners that are willing to experiment a lot to build a great business model. And partners need to be onboard on equal terms, sharing the same risks and goals. You can’t time your success in an early stage venture, and it doesn’t sound good to me to rush into “scale mode” before finding a profitable product / market fit.
Early-stage startup returns are binary — they either become failures or big successes with little in between that’s meaningful to investors. That’s why I don’t understand sophisticated early stage investors so worried about terms that put the entrepreneur in a very uncomfortable position. In my view, this is not fair and not wise. It doesn’t help their returns and it misaligns the shareholder’s goals.
Raising capital under preferred terms is a loan that looks nice on the balance sheet.
After series A, when you already built an exciting business model and your focus is on scale, it makes sense to take loans (equity capital with preferred terms). You can build a reasonable financial model and be more comfortable with the “all in” approach.
Although venture capital firms invest on “what could go right”, they manage their investments obsessively on “what might go wrong.” And on early stage investment, this obsession seems irrational.
know the ins and outs and wanted to educate myself. This book fit the bill and I am reasonably confident that I have a much better understanding than I did before - and I'm not a business professor! However, I think it would be somewhat tough going with no business background or interest whatsoever.
If I ever get to this stage with one of my companies (or one of my student's companies), I would re-read this with a lot more attention to detail! If you are going thorough the process for the first time, and don't take the time to read this book, you are nuts!
One minor suggestion: it would be nice (even though the authors are venture capitalists) to have a bit more time spent on how (and why) to finance a business without getting money from VC firms and angel investors.