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:

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 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 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 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 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

Question: In a Series A, the investor is proposing a preferred stock with warrants. The warrants relate to the accomplishment of milestones, are optional, and are priced at 50% above the initial price. Is there an advantage to this versus structuring a two close deal. How do we make the second investment mandatory, more like a call option?

Ahhh. Nothing like a complicated one to kick off the first Ask the VC question in a while. To understand this a little better, let’s break apart the questions from what is being proposed.

It sounds like the proposal is a “Preferred A” with a “warrant” for more “Preferred A” at a price that is 50% more than the initial price. In simpler terms, let’s assume that it’s a Preferred A investment of $1m at $1 / share (or 1m shares of stock). Let’s assume a post-money valuation of $4m. This means that there are 3m shares of common stock since the 1m shares of Preferred buys 25% of the company.

In addition to the 1m shares of Preferred, in this deal the investor would get another 1m shares of Preferred Warrants priced at $1.50 / share. This means that at some point in the future the investor could invest $1.5m for another 1m shares.

Assuming there were no other changes to the capital structure, if the investor exercises the warrant there is a total of $2.5m that goes into the company (the original $1m plus the $1.5m from the warrant). This buys a total of 2m shares. Since there are 3m common shares, this results in the investor owning 40% of the company for $2.5m (2m investor shares / 5m total shares). The post money valuation after the warrant is exercised is $6.25m (2.5m / 0.40).

Got that? Bottom line – the investor is proposing a $3.75m pre-money / $6.25m post-money for a total investment of $2.5m

Now to the questions: First, Is there an advantage to this versus structuring a two close deal? Unless we address the second question, where the investor is compelled to exercise the warrant upon completion of the milestones, this is a bad deal for the entrepreneur. If the warrant conversion is optional on the part of the investor, it’s simply a pricing mechanism for capturing upside if the company is successful. If things aren’t going well, the investor doesn’t need to exercise the warrant. Depending on the actual warrant terms, the investor may have a limited time window to exercise (1 year, 2, years, 5 years) – the longer the time window, the more “optionality” the investor has. Generally, a warrant like this in an early stage investment (e.g. a Series A round) is unusual and either indicates an investor who is unhappy with the pre-money valuation and trying to capture additional economics, or is unsophisticated about typical Series A investments.

The second question is the important one. How do we make the second investment mandatory, more like a call option? The warrant should be tightly tied to milestones that the entrepreneurs believe are achievable. As VCs, we don’t like this approach, but some VCs do as they believe it focuses the entrepreneurs on what the VCs think are the hurdles (or milestones) that define near term success. If the milestones are clearly defined, achievable, and the warrant has to be exercised upon achievement, then this is merely a pricing mechanism and – as the entrepreneur – you need to decide if you are happy selling 40% of your company for $2.5m.