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:

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 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 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 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 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 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 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 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

Question: As a start-up with no history and no customers (we haven’t launched yet) how do I figure out how much equity to assign to myself as the founder? I have spent the last one year developing and writing the business plan. I hired two consultants both MBA’s with real world experience to help in polishing the business model and writing the plan. They agreed to do the work on contingency basis to the tune 0f $18,000 so far. I haven’t issued any shares yet. Is it paramount that I issue shares before approaching funding sources. How do I value the company? A company in similar business sold recently for over $300 million and another sold for $1.5 billion. Of course these are mature companies, but still in the same business.

Answer (Brad): If you are the only founder, the answer is simple – 100%.  If there are multiple founders it’s a lot more complex and you may need to resort to arm wrestling or coin tossing.  Based on your question above, it sounds like you are the only founder, so you’ll own the company until the funding event. 

The actual number of shares are irrelevant – you can issue 1 (and own the 1 share – hence 100%), or issue 100 (and own 100 for the 100%), or issue 1,000,000,000 (and own 1,000,000,000 yourself – although I’d suggest this is both unnecessary and can cost you corporate taxes you don’t want in certain cases.)

Regarding valuation – there is no easy and short answer.  We’ve written about this before in How Do VC’s Determine Company Valuations? – I recommend you start there although every case will vary.

Dick Costolo (aka Ask the Wizard) has two excellent posts up titled Options Acceleration and Employee Options and Grant Size.  If you are granting options or receiving an option grant, these are both excellent posts to read.

Q: On average, what percentage of a company does the “typical” entrepreneur own by the time of a “successful” exit? Obviously, huge YMMW, but what’s a reasonable expectation, say, assuming two founders, middle-of-the-road terms from investors, two or three rounds of funding, and an acquisition? Or is the range so broad as to be meaningless? If so, what’s a reasonable upper bound?

A: (Brad) The short answer is “the range is so broad as to be meaningless.”  I love questions that don’t have precise answers, and this is a classic one.  I’ve been involved in companies where the founder equity (sum of all equity the founders have at exit) ranges from less than 5% to greater than 90%.  That’s a pretty big range.

If you assume the law of large numbers, you end up with a normal curve.  Without doing a detailed analysis, most of the deals I’ve been involved with where there are two founders, middle-of-the-road-terms, and two / three rounds of funding result in a tighter range – probably in the 20% – 40% range.  Again – it’s a normal curve so you’ll get higher and lower cases.

(Brad) Dave Naffzinger has another excellent post up on Startup Stock Options titled Vesting Schedules & Acceleration.  I’ve written about vesting plenty of times and gotten plenty of comments thanking me for the VC view but suggesting that the entrepreneurs view might be different.  Dave is a co-founder and early employee of several companies – he explains why there is actually good reasons for entrepreneurs / founders to want their fellow founders to also have vesting provisions on their stock.

Dave Naffzinger – VP at Judy’s Book and previously a co-founder of Quova has started a series of posts on stock options.  His first one is titled Startup Stock Options: ISOs vs. NSOs.  Excellent stuff if you are an entrepreneur.

Q: In modeling out an early-stage deal, do you think it would be reasonable to start with a 20% option pool  (Round A) and then plan to refresh that on subsequent rounds (ie, make an assumption about having key hires in place by round C or B)?  Or should we just allow that option pool to get crammed down?

The starting point – on average – for an option pool after the Series A financing is 15% to 20% so this is certainly a reasonable starting point.  Recognize that there is a nuance here between “pre-money” and “post-money”.  I like to talk about the option pool as “post-money” so the valuation doesn’t impact the pool as part of the financing – it makes it a little simpler to discuss.

In each subsequent round, the new size of the option pool will likely be part of the financing negotiation.  Most Series A investors expect you to use up most of the option pool for early hires so that when it is time to raise a new round, you’ll likely need additional options to incent your future employees.  This often ends up being a three way negotiation – between the founders/management, old investors, and new investor(s).  The new investor will want the options to be “pre-money” so the burden of the increase of the option pool is pushed back on the old investors and existing founders/employees; the old investor / founders want this to be “post-money” (or after the financing) so that dilution is shared by everyone, and non-founder management often are indifferent (especially if they are getting additional options in the financing), but want to make sure the size is large enough to cover the option grants they think they will need for the next wave of employees.

There is no simple rule of thumb here – it’s a negotiation.  However, the amount needed to incent employees going forward is usually a number that can be determined approximately.  Everyone will be incented to have the “correct amount of options” (although the definition of “correct” may vary between parties.)  But – the idea that the original 20% option pool will last the entire life of a company is not logical and is pretty unusual.

Rick Segal has today’s VC Post of the Day with his excellent post A Fatal Paper Cut.  Rick tells the story of the death of a promising young startup as a result of a messy early capital structure that wasn’t managed correctly from the beginning.  In due diligence, the VC chickened out and the company slammed into the wall.  All of this could have been avoided – documenting the early equity grants correctly and taking the capital structure seriously from the beginning would have solved all the problems.  Rick gives some great suggestions for this.  The VC also might have been able to get comfort with a capitalization rep from the founders, although in this case that clearly wouldn’t have done it.

This is a must read post for any entrepreneur that is setting up a new business and giving out equity grants (options or shares) of any size in exchange for services. 

Today’s Great VC post of the day is a long, detailed example of How Equity Dilution Works by Ken Gaebler.