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:

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 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 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 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 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 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 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 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

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:

• Term Sheet
• Articles of Incorporation
• Bylaws
• Subscription Agreement
• Election Consent

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.

Q: My client is looking for a 5 million dollar investment from a VC firm. What can he do to protect himself if he is worried that the VCs will acquire the rights to his product and then try to fire him and keep those rights? Does this happen often?

In addition, he anticipates that the new entity will generate tax losses in the early years and wants to share them with the VC. What can he do here? Finally, he would like to be able to force the venture to buy back his shares if after 5 years the company is still private. Can any of these things be done?

A: (Jason) Reputable VCs don’t engage in this type of behavior – funding and then stealing a company.  For one, it’s not a repeatable model.  If a VC acted this way, they wouldn’t have any deal flow to consummate future deals.  More importantly, VCs invest in folks to run companies – we have no interest in running your company for you, as we have other investments that we monitor. 

Also remember that VCs don’t acquire any rights to your product, they simply invest in the company that owns the rights, presumably.  So the corporate entity is what controls the rights, not any particular person.  If you question is how many CEOs leave the employ the company that they’ve created and raised money for, it’s a relatively small number.  More interestingly, the vast majority of CEOs that leave companies do it by their election, not that of the VCs.  Many CEOs are serial entrepreneurs and prefer starting companies, not running them after they become larger and more successful.

To answer your other couple of questions, neither of these will work.  Since you will have to incorporate your entity as a c-corp, these loses won’t flow through to the VCs and even if they did, VCs can’t use these types of loses.  As for the VC buy back – forget about it.  That’s a non-starter.  If I fund a company and can’t get liquidity, the founder certainly doesn’t have the right to get me to put even more money in to buy him/her out.

Q: Why don’t VCs invest in real estate? I have a great idea but I can’t get past the sentence where I mention it’s a real estate deal.

A: (Jason). We don’t invest in real estate because we don’t know what we are doing in that market. Okay, that was a little glib, but it’s true. VCs don’t / shouldn’t invest in sectors and themes that they don’t understand. Outside of some folks that I know who made some shrewd residential moves with their personal properties, I’d not want to trust my money to a VC doing a pure-play real estate deal.

Our investors don’t want us in that arena either, as evidenced that most of us have a charter of what types of deals we can and cannot invest in. For instance, a VC’s partnership agreements might say that they can “invest in the domestic technology industry in companies that do not require government approvals for the sale of their products.”

In this example, the VC could invest in U.S.-based technology companies, but not in any industry where the government would have to okay the sale of their portfolio companies products. Translation: this VC can’t invest in biotech (FDA approval) and better be careful about some media deals (FCC approval), etc. The VC would, however, be able to invest in a technology company that provides solutions to the real estate industry (think Zillow.com).

There are plenty of real estate development corporations out there who can much more effectively play in this space.

Question:  I’ve always been curious, what are standard GP terms for venture funds?  What carry percentages are there?  How much do GPs actually put into funds?

Our Take:  There is a range, but in terms of general economic terms:

-  Management Fees: 1-3% of capital commitment.  Smaller funds usually have a higher percentage.  The norm is usually 2-2.5%.  Note that after the first five years (when the period for making new investments normally ends), the percentage usually decreases. 

-  Carry: 15-35%.  Mid-case is 20%.  Some newer funds have lower percentages and some of the large top-tier funds have 30% and higher.  Some funds have a scale whereby if they meet certain profit hurdles, their percentage increases. 

-  GP commitment: 1-5%.  The trend over time is for the percentage to increase.  This is both because investors want the GPs to have more skin in the game, but also because it’s a tax efficient way for GPs to receive compensation assuming they are successful.

Question:  I understand that each fund has a time limit (5 to 10 years). What are the dynamics of the funds? Does a fund nearing the end of its term tend to try getting as many exits as possible (at any price)? What happens with portfolio companies after the end of the fund’s term? Is it true that they turn worthless, even “thrown to the dogs?”
Or is it the opposite? Does a fund with money nearing the end of its life-term tend to become “easier” or even desperate to find deals?

Our Take: VC funds have finite terms of life. Generally, funds have 5 years to make investments in new companies and have an aggregate of 10 years to harvest the fund. In addition, most funds have a provision which allows the fund managers to unilaterally exercise 2 one-year options to extend the life of the fund if necessary to maximize investor returns. In other words, think about a fund having two “lives.” The first “life” is the period of time that the fund may invest in new companies. The second “life” the fund may operate to manage its current investments, including follow-on investments.

To specifically answer your questions, a fund nearing the end of its life (10 to 12 years) will try to liquidate its investments in order to return value to its investors. After the fund hits its termination period, it must shut down and either distribute cash or securities to its investors. If the company is private, distributing securities is not feasible; therefore one does see VCs selling the fund assets. This isn’t a fire sale – there are plenty of professional buyers out in the market that purchase these types of assets. That being said, if the company is successful, the fund will have sold out too soon.

With respect to the first life, if the fund has excess cash and is getting near its 5 year cut off for making new investments, we have seen cases where the cash flows a bit looser out the door. Most reputable VCs, however have pretty good control over their cash available for new investments and plenty of deal flow, so normally we don’t see a rush to spend before the time period expires.