Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist is the definitive guide to venture financings. This book is for anyone who wants the insider's guide to raising money, negotiating deals, and to know what really makes venture capitalists tick. Don't believe us? Check out these recommendations:

I've been reading and loving Brad Feld's blog for years. He's one of my favorite venture capitalists on the planet. I'm delighted Brad and Jason have written the definitive book for entrepreneurs seeking to learn about raising and going through the venture capital process. - Bijan Sabet, Spark Capital I would highly recommend .Venture Deals. to any entrepreneur, venture capitalist, student, or casual reader who wants to get the .true scoop. on how venture deals come together and what the venture capital landscape truly looks like. The authors are not only veterans of the industry, but are willing to share their unvarnished views of what venture is all about. The reader will not find the insights shared here anywhere else. And, perhaps best of all, the authors write in an easily readable, casual style that makes the book quite fun to read. - Craig Dauchy, Cooley LLP In my entrepreneurship class at Stanford, the number one topic is venture financing -- how it works and how (or even whether) to get it. There are no two better people to coach an entrepreneur through the venture process than Brad Feld and Jason Mendelson, and next to in-person guidance this book is the next best thing. I am planning to make this required reading for my class at Stanford. - Heidi Roizen, Fenwick and West Entrepreneurship Educator, Stanford University Technology Ventures Program 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 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 The adventure of starting and growing a company can 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 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, Union Square Ventures 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. Its like having a venture capitalist as a best friend who is looking out for your best interest and happy to answer all of your questions. - Emily Mendell, Vice President of Communications, National Venture Capital Association

Venture Hacks has a great list of high quality angel and seed investors.  I was recently added to the angel list (there goes the neighborhood) and join an active crew of angel and seed stage VC investors that currently includes Rob Go, Ariel Poler, Aaron Patzer, Jason Calacanis, Ho Nam, Georges Harik, Rob Lord, Andy Weissman, Bryce Roberts, Matt Mullenweg, Satish Dharmaraj, Brian Norgard, Mike Hirshland, Roger Ehrenberg, Peter Chane, Josh Felser, Mark Suster, Keith Rabois, Saar Gur, Salil Deshpande, David Cohen, Dave McClure, Bill Lee, Jeff Clavier, James Hong, Auren Hoffman, Jon Callaghan, Chris Sheehan, Jeff Fagnan, Michael Dearing, Dharmesh Shah, Manu Kumar, and Naval Ravikant.

There’s plenty of info listed for each person – see the example of my listing below.

If you are an angel investor or seed stage VC, please apply to be added to the list.  If you are looking for angel or seed stage VC investors, have at it!

Q: I have an angel investor that is asking me for full anti-dilution protection for the lifetime of their investment, along with a host of other economic terms including dividends.  They are putting in a small amount of money, but are insisting that "this is the way it is done."  This doesn’t seem right – am I missing something?

A: (Brad) One of the challenges with angel (and VC) investors is that when the macro-economy is tougher and money is harder to find, terms get tougher.  In many cases, especially with later stage companies, this is completely appropriate.  However, it’s usually a mistake on the part of the investors with early stage companies.

In our experience, the simpler and more straightforward the terms in the angel round, the better for all parties.  The entrepreneurs raise much needed capital at a fair price on terms that are easy to execute on.  Equally importantly, these terms shouldn’t impede any future financings.

As an early stage VC, I’m very comfortable investing in a company that has previously raised angel money.  However, I will always insist on cleaning up any angel deal that was done poorly.  "Full anti-dilution protection forever" is an example of a term that should never exist.  Just because an angel investor bought 1% for an investment of $25k (implying a $2.5m post-money valuation), that doesn’t mean that angel investor should have 1% of the company after another $10m has gone into the company.  While theoretically this is possible to negotiate away in the next round, I’ve encountered angel investors who held up the entrepreneurs and almost killed companies over irrational terms like this, mostly just to demonstrate "how well they could negotiate."  Whatever.

Another silly example is the whole notion of dividends in an early stage investment.  Dividends occasionally get paid out in VC-backed companies, but only when the companies become solidly cash flow positive and have a huge surplus of cash.  This is such an atypical event that they early angel investors shouldn’t be worried about it.  In addition, it’s another term that will likely get cleaned up in the next round, as the VCs will likely put generic dividend language into the deal (e.g. "non-cumulative dividends of 8% will be paid out only when declared by the board", which almost never happens.)

My strong suggestion to all angel investors – regardless of the macro-economic environment – is to "keep it simple and fair."  My recommendation to all entrepreneurs negotiating an angel round is to make sure you have an experienced angel investor leading the charge and helping you set terms.

Q: How do I do multiple closings on a single round work? In our case, we have an investor wishing to give us  headstart, certainly I imagine not an uncommon case in friend and family scenarios, though here we’d have multiple rounds of angels, without kicking up the gears to flush out a full seed round with other investors before that money changes hands.

A (Brad): There are several ways to do this.  Let’s break it into two cases: #1: You are doing a convertible debt round.  #2: You are doing an equity round.

#1: Convertible Debt: This is the easiest case.  For a convertible debt round, you can keep it as simple as issuing a promissory note for each investor.  This promissory note can contain any special conversion terms, including what happens on a qualified financing (including the definition of the qualified financing), what happens on a sale of the company, and what happens if the company fails.  You can do as many closings as you want by simply issuing a separate promissory note for each investor.

#2: Equity Round: The best way to do multiple closings on an angel equity round is to raise the early money using the convertible debt approach above with an automatic conversion into a pre-negotiated equity financing once a certain amount of money is raised.  Let’s say you are planning to raise $500k and your early investor is willing to do $100k of it at a $1.5m pre-money valuation.  You can negotiate the equity terms with this investor, issue a promissory note for $100k to get that money into the company, and then agree (contractually or not) to do the full round once you’ve lined up the $500k.  You do run the risk that either (a) you can’t raise the full $500k or (b) some of your later investors will want different terms.  If you have a good relationship with the first investor(s) you can usually manage this by including them in the process.  You can also put a "most favored nation" clause in the promissory note to adjust their conversion features to match whatever the financing ends up if it is more favorable to them than the terms the negotiated. 

An alternative approach to #2 is to negotiate all the equity terms with the expectation that you’ll have multiple closings on the equity round.  Then, do a first closing with whatever investors are lined up and have a fixed length of time (typically 60 – 120 days) to raise more money on the same terms.  Again, you should be conscious of the idea that you might have a new investor want better terms – since this is your early angel round, you should consider including a most favored nation clause so the investors that committed to you early get the same deal as later investors in the same round if the terms happen to change.

Q: I have several angels that say the want to invest but non of them wants to lead. In your experience: 1) Is this a "call option" strategy rather than a serious investment intent? 2) any thoughts on how to turn "co investors" into lead? or should I try to get a lead of this "co investors" pack?

A: (Brad) While it’s hard to tell whether this is a call option or serious investment intent, it is not that helpful in getting the round pulled together.  When doing an angel round, you need two things: (1) a lead investor who is willing to negotiate terms and (2) supporting investors that won’t lead but are committed to participating on whatever terms the lead negotiates with you.

While you can’t contractually commit the supporting investors, you can usually separate the real ones from the tire kickers (or – more generously – the call option people).  Committed supporting investors are going to let you use their names with potential lead investors, will engage in active networking, and will name a specific amount they are willing to invest. 

These supporting investors are typically called "soft circles" – you’ve got a commitment from them, but it’s not a legally binding one.  A soft circle will always have a dollar amount attached to it.

So – don’t try to convert these "followers" into "leads".  Instead, try to get them into a supporting investor / soft circle mode.

I’m not a fan of convertible notes as the form of an angel investment.  When I’m making an angel investment, I much prefer to price the round and do a "light Series A" (simple terms, but still a preferred instrument.)  Basil Peters has a series of posts up on Angel blog that talks about the problems of Convertible Notes for Angel Investing, suggests Exchangeable Shares for Angel Investors, and even provides a One Page Term Sheet for Angel Investors.

Todd Vernon has today’s great post of the day titled Angel Financing.  Todd is the CEO of Lijit (one of our portfolio companies – if you are a blogger – go check it out) and just completely nails the different types of angel investors and the issues surrounding how an angel financing works.  This is a must read for anyone raising an angel round.

Q: Convertible notes are popular instruments for angel investors when a future VC round might occur. But, if it takes longer to get to the venture round than you thought (doesn’t it always?) what happens when the note comes due? Can one investor call the note and put you out of business?

A:  (Jason).  Yes, technically they can, but in practice this rarely happens.  Normally, one of two situations exist:

1.  the company is doing “okay” just behind in it’s fundraising and it will get funded; or

2.  the company is not going to get funded and it’s realistically done.

In case one, the investors would be irrational if they called their notes, as they would get pennies on the dollar (remember the company is spending their money along the way) and preclude any chance of funding and thus them getting an attractive return.  Even in cases where funding seems remote, most of the time investors will give the company the maximum opportunity to get funded and continue on. 

In case two, the company is going to shut down probably, so it’s probably not too traumatic to call the notes.  In any event, the investors will get back pennies on the dollar, so it’s still in the best interests of the investors to let the company run as long as possible before throwing in the towel.

One thing to note:  don’t personally guarantee angel notes.  In that case, the calling of the notes will attach to the entrepreneur’s personal assets and may indeed incentivize investors to call their notes sooner than later.

David Cohen – the ringleader of TechStars – has a good post up titled Thoughts from the west out east, and vice versa.  Last week David was a guest speaker at the Northeast Regional Investor Conference held in Portsmouth, NH.  In addition to running TechStars, David is an active angel investor in Colorado and had a very interesting reaction to the way “better angel groups – both east and west coast – worked.”

“One thing that I heard repeatedly today from the better angel groups (east and west) is that every single deal that is presented to their group is sponsored by one of their members. That member introduces the deal before the pitch. I got to see 3 “quick pitch” deals today and they were all high in quality. They were effectively introduced by the sponsor angel. If the deals weren’t good, that angel would look bad for bringing the deal to the group. Social pressure was at work naturally and effectively because of this simple rule. No screening committees, application fees, etc. Just go impress a member angel. We should be able to learn from these best practices in Colorado, but we haven’t. Both Kieretsu and CTEK require applications, payment of fees, and artificial screening processes. Just make them get to and impress an active angel who is a respected member of the group. Much cheaper, no fees required, and good dealflow. If they can’t find and impress just one angel enough to get there, there’s a 99% chance they shouldn’t be there anyway. I continue to hope we see this sort of model adopted with Colorado’s angel groups. It’s certainly the way many of the very high quality angel deals get done outside of those groups already.”

Read the rest of the post for what David found offensive and then – on second thought realized was correct.

Q:  I’m CEO of a venture backed startup. In addition to my VCs, I have about 20 angel investors from the Series A round. What is the appropriate way to handle information requests from smaller angel investors who want copies of my board presentations and monthly financials? These angels do not have information rights, but they are requesting the courtesy of receiving the same materials I provide my VCs. They are willing to sign NDAs, but I’m nervous about forwarding electronic copies of sensitive materials.

A:  (Jason)  This is an issue that all angel-funded companies have to deal with and while there is no “right” answer, there are some general guidelines to follow.  First of all, regardless of what the documents say, you want happy investors and you do owe them some information.  That being said, it’s probably not the same information that the Board receives.

I think that you can justify giving the board different information for two reasons:  One, the board has duties of care that mandate it taking a more in-depth look into the company to comply with these duties and two, board discussions (if attended by the company’s lawyers) are protected by attorney-client privilege.  If you were to pass out the board materials to your angel investors, it’s arguable that you’ve waived the privilege.

Given your amount of angel investors, I’d consider putting together an alternative information packet which would include a cover letter, some business updates and financials.  I would think that quarterly updates should suffice.  This could easily be PDF / email / hardcopy, whatever you feel most comfortable with.  You could also choose to do a conference call with your angel investors every so often and let them ask questions.  Note, however, that this format can turn into a “free for all” and I’d be cautious in using this approach.

Q: It seems that many VCs do angel deals on the side. For early stage (or even mid stage) VCs, how is this justified to their LPs? Wouldn’t VCs have the ability to select the best deals for their own cash and leave the LPs to invest later (through the fund) on at a higher price?

A: (Jason) This isn’t a problem with reputable VCs. Here is why:

First, most fund agreements say that VCs can’t engage in this type of behavior. This can be achieved in a number of ways from the LP advisory board having to sign off on all angel deals of the partners to a provision in the LP agreement that says VCs can only do angel deals that the fund would not consider for investment.

Second, assuming that the VCs do invest in angel deals, most don’t have enough money, personally, to fund a company through its life cycle. In fact, many only fund the angel round and don’t continue funding future financings. Bottom line, they are going to need outside capital – probably from their own fund. In this case, the only legitimate way to deal with the fund investing in this company is to buyout the VCs personal stake at his / her cost – no markup or cost of capital. In this case, the fund is actually getting the advantage of buying shares at a lower price with less risk because the company is later staged.

Third, remember what VCs are in business for: to raise additional funds to provide above market returns for their investors. If VCs were to hoard all the good deals in the personal portfolios, their main funds would perform poorly and they would not be able to raise future funds.