Author Archive

Ask the VC Live (Update) and Start Up Drinks

As previous posted, I’m presenting at the University of Colorado a 1.5 hour "crash course" lecture on the VC industry.

There are two updates:

1. The program is February 24th (not 25th, as originally posted) at 5:15 at the CU law school.  You can find more information here

2. Several folks are getting together and re-creating "Boulder Start-up Drinks" after my presentation.  This was a good event that I was sorry to see fade away, so I’m glad that it’s found new life. 

I am still working on getting the presentation recorded in some fashion, as there has been a fair deal of interest.

Ask the VC Live (Update) and Start Up Drinks

As previous posted, I’m presenting at the University of Colorado a 1.5 hour "crash course" lecture on the VC industry.

There are two updates:

1. The program is February 24th (not 25th, as originally posted) at 5:15 at the CU law school.  You can find more information here

2. Several folks are getting together and re-creating "Boulder Start-up Drinks" after my presentation.  This was a good event that I was sorry to see fade away, so I’m glad that it’s found new life. 

I am still working on getting the presentation recorded in some fashion, as there has been a fair deal of interest.

Model Seed Documents – Direct From Techstars

Today, our friends at Techstars posted their model forms of seed financing documents.

Techstars worked with Brad, myself and very closely with Cooley Godward Kronish, LLP (and specifically Mike Platt) to put together a set of “Model Seed Funding Documents” that anyone can use.

There are five primary documents in the set:

Of course, these are just example documents so all legal disclaimers about usage apply (e.g. “do with them what you want, but we take no responsibility for your actions.”)  That said, I think these are a great starting point for anyone doing an early stage financing.

Ask The VC – Live

For those of you in the Boulder/Denver area, I’m giving a 1.5 hour "crash course" lecture on the VC industry. 

The program is February 24th at 5:15 at the CU law school.  You can find more information here

The topics will include everything from what makes VCs tick, who are our bosses, what are things that you can do to improve your chances of receiving funding and things that many VCs don’t want to talk about.  No question is off limits and I hope that it will be a very interactive forum.  Consider this to be a live version of Ask The VC. 

Hope to see you there.

Why Is My Venture Capitalist Wasting My Money By Changing My Indemnification Agreements?

I’ve gotten several emails recently from folks complaining that their VCs are wasting their legal spend on changing indemnification agreements.  What is going on and why is this important?

Mike Sullivan at Howard Rice has the best plain English explanation that I’ve seen:

Let’s say you’re a VC and you sit on the board of a portfolio company. Something goes wrong at the company; and the plaintiffs sue everyone in sight, including you. You don’t welcome the idea of paying litigation costs out of pocket, but luckily you have an indemnity agreement from the portfolio company – saying that the company will cover litigation costs and liabilities. You also are indemnified by your VC fund, but until recently most people thought that was just a “backup” – in case the portfolio company was insolvent.

But that was before the recent Levy v. HLI Operating Company case. There, a Delaware court surprised most experts by holding that where the individual board member had indemnity rights both from the portfolio company and his fund, the fund and the portfolio company had to share claims for any indemnity claims required to be paid.  [This clearly will lead to a financial and process nightmare dealing with different insurance carries and attorneys. - Ed.]

The result? VCs are changing their indemnity agreement forms. The NVCA form of indemnity agreement has been changed to make it clear that the portfolio company indemnification is the board member’s primary source of protection, and the VC fund will have to pay only if the portfolio company is unable to do so. Since most people assumed that was true prior to the Levy case, our experience is that most companies aren’t fighting this change.

Choice of Entity – C Corps, S Corps, LLCs?

We’ve written plenty in the past about choice of entities and which ones might make sense for your particular business, but today we found a cool chart that really summarizes nicely.

Enjoy. 

Healthy Ways to Tighten the Corporate Belt

Our friend Amy Hartman, who recently started her own law firm specializing in employment matters wrote a great piece called "Feel the Burn."

It’s a very informative, yet easy to read piece on strategies for cutting your company’s burn rate during these challenging times.

Most of her advice is with her employment law hat on, which is certainly a chief concern when contemplating cost reductions.

Take a read- it’s a good one.

How Does the Current Macro Economy Affect Venture Capitalists and Startups?

We’ve gotten many emails over the past few days wondering how the meltdown is going to affect VCs and startups.  The quick answer is "not much of an effect – so far."  Just linking around, here are some posts that you might want to check out if you’d like to read more.

Mendelson’s MusingsHow Does the Market Craziness Affect Venture Capitalists and Startups?  – Talks about VC and Startup fundraising environments.

Feld ThoughtsBuild Trust by Staying Steady in Rocky Times – Talks in detail about macro cycles, banking and how it ties to the VC ecosystem.  Also see: Gloom and Doom – or Capital Efficiency – reference Fred Wilson’s posts on similar subjects and argues that we aren’t in the worst case scenario. 

or see this presentation from Sequoia Capital which tries to put the current situation into historical perspective.

There are many other good blog posts if you go hunting around, but this should get you started. 

Why Wont The Venture Capitalist Return My Phone Call?

Q: We pitched to a venture group 3 times in July and August. They kept telling us that they were very interested and wanted to learn more about our venture so we shared complete details of our venture hoping that they would invest.

Now for last 6 weeks they have gone completely silent. They used to respond to our emails within hours but now…no response to emails or phone calls. Once we got one of their partner on the phone and he promised to call back and hasn’t yet. We would like to move-on. Are we nuts? Why would they spend so much time then behave like this? Why won’ they just say "NO" to us?

A: (Jason)  To answer your first question, no, you aren’t nuts and yes, you should move on.  Clearly they aren’t interested in funding your company.

The bigger questions is "why do some VCs act this way?"  I really don’t know or understand this behavior, but it’s not uncommon.  We hear on a regular basis from entrepreneurs that VCs frustrate them this way.

What’s probably happening is that they have other companies in their pipeline that are sorting higher in interest than yours, but they’d like to keep you as a potential option if their other opportunities disappear.  That being said, I’ve never heard of a situation where a VC lead goes completely cold and then becomes hot again.  Think of this similarly to any romantic relationship that you’ve ever had. 

We think it’s really important to say "no" quickly.  While it’s not always easy to say no (see Brad’s post on "Why am I passing?"), it really is the most fair thing to the entrepreneur, even if hard to hear.  Dragging the process along does no one any good.  Sorry to hear about your experience – not all VCs are this way. 

What Price Adjustments Do You See Prior To Closing In A Financing?

Q:  Can you please explain what sort of adjustments you should expect to the price that a VC promises in a term sheet between the signing of the term sheet and signing of a final stock purchase agreement (SPA)?

A: (Jason)  To answer your question, we first need to determine what the definition of "price" is.

I don’t care what price per share I pay.  It’s an irrelevant number.  What’s relevant is the pre-money valuation.  That, along with my investment will determine what percentage of the company that I own post investment.  For more on this, see this prior post

If the question is "how often do I see the pre-money valuation change from term sheet to SPA" that answer is almost never.  Only in rare cases of something material happening to the company, I tend to think "a deal is a deal."  If something that bad happens to warrant a price change, it’s probably more likely that the entire deal falls apart.

The only other situation that could potentially change the valuation / price is if something is found in diligence that wasn’t known to the VC at the time of term sheet.  For instance, if founders have deferred salaries or have debt that need to be paid back and a large chunk on the financing is going to be immediately used, this too might change the economics.

If you define price as the "price per share" (not having anything to do with valuation), then I would tell you that I think EVERY deal that I’ve been involved with has had a price adjustment during this period.  The price per share is based on the outstanding equity of the company and rarely does this get 100% figured out until right before closing.