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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
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
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
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
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
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

When Should A Company Be Formed Around an Idea?

Question:

I participated in a company’s “app challenge weekend” (which they described as somewhere between a hackathon and a startup weekend). I am excited to continue working on the product that my team built over the weekend with 2 of the team members (my brother and the guy who pitched the idea).

My preference is to formalize a relationship by forming a company.  My fear is that the guy who pitched the idea will decide in a month or two that he doesn’t need us and tell us we’re not working on it anymore.  He formed a company 2 years ago that he talks about (though from the research I’ve done has no IP or product of any kind) and thinks that this idea fits into that vision, but doesn’t want to include anyone.

Should we form the company now, using fairness and our best sense of who will be doing what work to split shares and come up with a conflict-resolution/decision-making process (I imagine this would be the board) to compensate for the fact that my brother and I just met the guy who pitched the idea a week ago? Or should we continue working on the product and see what happens?

If you have any concerns today, then the last thing you want to do is continue and “see what happens.”  We always tell startups to deal with their issues immediately.  One, they don’t get any easier over time, but more importantly, the issues are easiest to deal with when the company isn’t worth anything / much.  As soon as one of the parties starts seeing dollar signs in their eyes, issues become much harder to deal with.

We’d suggest that you form a company (LLC or S-Corp is fine at this point), divide up the equity and make sure it is subject to vesting.  That way, if someone does decide to leave, they will not leave with all of their equity.  Make sure that there is a strong agreement in place that contributes all the IP that you created during the weekend to the new company.

As for dispute resolution, there are two ways that this can work.  One, the equity owners of the company can vote the issues.  In this case, if you all owned equal amounts of equity, two of the three of you could vote the issue to approval or veto.  Or you can have the board vote, as well.  In general, if you are a three person team and you are already planning on “dispute resolution strategies” it might be time to sit down and make sure that you are all on the same page going forward before you start a business together.  It’s not normal that shareholder and / or board votes are happening very often with companies this small.

June 12th, 2012 by     Categories: Uncategorized    

Weiss: The CEO’s Weekly Checklist

Scott Weiss, a partner at Andreessen Horowitz, has an excellent post up on GigaOm titled The CEO’s Weekly Checklist. I’ve gotten to know Scott over the past few years via the board of Return Path. Scott was co-founder/CEO of IronPort (acquired by Cisco) and built a very significant and powerful company – his checklist comes from his experience growing as CEO from the beginning of IronPoint to an over $100 million company.

May 13th, 2012 by     Categories: VC Post of the Day     Tags: , , ,

Baldwin: Advisors – Stop Screwing Startups

Today’s post of the day comes from Micah Baldwin. Micah isn’t a VC – he’s an entrepreneur, CEO, and experienced mentor (he’s been involved in TechStars since the  beginning.) He has a great rant titled Advisors Stop Screwing Startups. He makes several very important points about how advisors are screwing startups, why they should stop, and why entrepreneurs should take responsibility for 100% of their equity and be a lot more careful with it.

As a long time advisor for many companies, I’m a huge believer in “give before you get.” If you are an amazing advisor, your reputation should precede you. Be free – help – and when you are providing real value, entrepreneurs should give you something in return. But entrepreneurs, if the advisor asks for something up front, be skeptical. Sometimes its legit, but often it’s not.

April 30th, 2012 by     Categories: Advisors     Tags:

Do My Early Stage Investors Own Too Much Of The Company?

Question: Most VCs commented that they can not fund current cap table where the CEO and COO would get 10% equity once fully vested while the current investors have 80%. We talked to our investors and they have agreed to rework the cap table, however, I would like to understand from you what should I change my cap table to?

More Context: I recently joined a very early stage company as their CEO. The company was founded by two people three years back who have funded it since inception to the tune of ~$200k out of which $60k is in loans and is on the books of the company. The rest of $140k are unbilled expenses. The company has ~1000 paying customers and in 3 years has earned ~$160k. Last years revenue was $52k. The company is still burning money to the tune of $24000 per annum. I am not taking a salary right now, but my salary (at 80% discount to my market salary) is getting accrued since January. Also, I have been offered 10% equity with 4 year vesting and 1 year cliff. At this point of time we are trying to raise ~300k at 2.4 mn pre money. Most VCs in India say we are too early stage for them and we have just started looking at angel investment as an option.

This is a tricky one because it’s not clear whether the two original founders are still active in the business. If they are, then the hired CEO and COO getting 10% equity each is probably not unreasonable given that the founders are separate from the investors. In the case where the founders are also the early investors, this doesn’t matter, as you can separate their contribution conceptually.

If the early founders are no longer involved in the company and you are effectively restarting the business, then this feels light given this stage. However, there is no standard situation. It ultimately a negotiation with the founders and with your new investors. It’s easy for an investor to say “this doesn’t work for me” – a logical response, if you believe they are interested, is “what works for you?” Basically, have them propose something and then work with the founders to see if you can get to a deal.

There are definitely cases where the early investors own too much of the company to make it fundable. For example, let’s assume the the early investors put up $200k cash for 80% of the company. These investors are not active in the company, but instead you and your COO are running it (from day 1). In that case, a new investor would look at it and say that the early investors ended up with too much of the company since they effectively got 80% for investing a mere $200k.

Finally, if you raise money, you should use the event to clean up the existing balance sheet. If you raise $300k, you don’t want the $60k loan outstanding (it should probably convert into equity) and you definitely don’t want the $160k of unbilled expenses hanging out there. In addition, your accrued salary shouldn’t be continuing to accrue or get paid out. One tool you can use to normalize the equity some would be to roll the existing $200k into the ownership that the founders have (e.g. they still have 80% but now have a cost basis of $200k and the loan + the unbilled expenses go away) and then you pick up additional equity associated with converting your deferred salary into equity (e.g. if you defer $135k over the year, you get another 5% in options post financing ($135k / $2.7m post)).

April 27th, 2012 by     Categories: Equity     Tags: , , , ,

Does Being The First Full-Time Paid Employee Affect That Founder’s Equity In The Company?

Question: I am one of three founders of a company.  Up until now we have been bootstrapping the company from our own funds and working part time on the company while having full time jobs.   However, we are now looking to raise some private funding and one of us will be transitioning to the first full time paid employee of the company.   The question is, does being the first full-time paid employee affect that founder’s equity in the company?     I can see two sides to this issue.  The first is the founders that are not yet paid employees would think that the other is  getting paid so FTE’s equity should decrease.  The second is the found that is now a paid employee is putting themselves at higher risk as they left there prior job to go fulltime at the new company.    How have you seen this structured in the past?

You do an excellent job of looking at both sides of the question. While the founder who is working full time for the company is getting paid and the other founders are not, the other founders presumably are still getting paid from the day jobs.

Usually in these kinds of situations, the comp being paid is (or should be) modest – just enough so the full time founder can cover his basic living expenses. Assuming this is the case, I think you can comfortably separate out the equity as a separate concept. Specifically, whatever the equity splits are separate from the compensation should remain.

Now, the full time founder could make the argument that he should get more equity since he’s working full time for the company but the other two founders aren’t. This is a stronger argument if the founder working for the company isn’t drawing a salary.

Of course, the equity doesn’t necessarily have to be split three ways between the founders. However, if you can separate the compensation from the actual equity splits, you can usually have a more rational conversation.

Regardless, it’s never easy. Just have the direct conversation and keep working through it openly until you get to a happy place. If you can’t reach a consensus among the three of you, then you will have bigger problems down the road.

April 19th, 2012 by     Categories: Equity     Tags: , ,

How Often Do Employees Of VC-backed Startups Get Stock Options?

Question: How often do venture-backed start-up employees (let’s say non-executives) get stock option grants? Besides the initial grant when they start, how often do “re-up” grants come? Should they be expected after further funding rounds? After significant accomplishments/promotions? Never?

The short answer, at least in the US, is “most of the time.” It’s pretty standard for every employee of a VC-backed company to get at least a minor option grant as part of their compensation. Employees should expect these grants to vest over time (usually four years) and have a one year cliff (which means the person has to be employed for a year to have any of the options vest.)

Regarding the other question, it’s much more variable. In the previous post I talked some about “re-up grants”. In some cases, especially if there is a lot of dilution from a financing, there are occasionally broad grants across all employees post financing. However, in many cases, there aren’t, and employees should expect to take at least some of the dilution from subsequent financings, especially in up-round cases where the value of their underlying equity is increasing.

Additional grants occur on an employee by employee basis in two cases: (1) extraordinary performance (also referred to as a “spot grant” or “spot bonus”) or (2) long tenure – once an employee is fully vested (after year 4) they will often get an additional grant, although this will usually be much smaller than the original grant.

April 3rd, 2012 by     Categories: Equity     Tags: , ,

How Do I Protect My Option Grant From A Down Round In The Future?

Question: I am considering joining a startup that is currently in the process of raising their next round of funding. I will be joining as a VP, reporting directly to the CEO, and considered an “executive”. Given the environment for this particular industry, it is very likely that the company will face a down round – perhaps as much as 50% of their last financing a year ago. What should I expect in terms of protection from both dilution and going under-water on my option prices given that I will be joining before term sheets and close of the round? Will my options be priced based on the previous round? Can I ask for some guarantees about % ownership and stock price post-funding?

Generally this is very hard to do. During your hiring process, you should address this directly with the CEO and ask him (a) what he thinks the prospect for a down round is and (b) if he’s willing to give you any guarantees on your stock position if one occurs. Most CEOs will say (a) I don’t expect there to be a down round and (b) no.

If you feel like you can negotiate then go deeper and ask for his word that if there is a down round you will receive an additional option grant that gets you close to your current granted amount. A great CEO will not commit to this – rather he’ll say it’s up to the team to increase value in the business regardless of external dynamics. If the team has performed well but the external dynamics have negatively impacted the value of the company (and subsequent financing), then it’s up to the board to consider additional option grants for employees in the content of this.

Some people will talk about the idea of being “trued up” in a subsequent financing. A long time friend likes to say “there is only 100% of a company to go around” so when someone gets “trued up” it’s coming out of someone else’s ownership. If a CEO commits to true you up in the future, recognize that it’s not a formal commitment unless it is documented as the CEO doesn’t have the authority to do this unilaterally (he’ll need board consent to do it.)

Now, let’s assume nothing has been committed to you up front and a down round subsequently occurs. In some cases, the company will grant additional options to make up some of the difference in dilution. This is rarely an amount that preserves your previous ownership as you should be taking some dilution, along with everyone else, as a result of the new financing. But – if the financing dilutes you 50% then a reasonable amount to expect would be an option grant that results in you only being diluted 25% to 33%. Of course, these numbers will vary a lot based on the actual financing.

If it’s a very material down round, in addition to granting new options, the company might reprice the existing options that are outstanding. This used to be difficult to do and have all kinds of weird accounting ramifications that tended to prevent this from happening. However, many of the rules have changed and all that is now required is a mildly tedious legal process.

April 2nd, 2012 by     Categories: Stock Options     Tags: , ,

Parker: Open Source and For-Profit Companies

On the heels of Yahoo suing Facebook for patent infringement followed by Tim Armstrong at AOL saying “hey Wall Street – look at me – I’ve got great patents also“, Andrew Parker (Spark) wrote a post that brought me out of my “intellectual property depression” titled Open Source and For-Profit Companies.

I’ve been thinking about advancing innovation in the software industry since I was in a PhD program at MIT Sloan School in the 1980′s studying under Eric von Hippel. Eric is one of the best thinkers I’ve ever encountered around this topic and Andrew’s post – which articulates a trend of for-profit companies open sourcing core pieces of their products – is powerful support of many of Eric’s theories.

Andrew’s money quote is:

“But, the most important part of Dan’s observation is that open sourcing the product inside a business is now becoming normal, and that’s wonderful.  Dan seems to be slightly pessimistic about this new world of corporate-controlled open source projects (I take that hint from his desire to rename this phenomenon), but it’s 10X better than having 5 companies all building the same product independently of each other in a closed manner, like what we saw in the column-store DBMS market over the past decade (Vertica, and companions).”

The construct of “intellectual property” – and the government’s right to grant an exclusive license to companies (e.g. a patent) as a way of “promoting innovation” has completely broken down in the software industry. Interestingly, this is happening at the same time that “being open with source code instead of protecting it through trade secret” is also occurring and both accelerating innovation as well as enhancing value in many new companies.

We are in a very complicated place in the evolution of the software and Internet industry. I hope we don’t fuck it all up. Thanks Andrew for weighing in with a clear example of something that is very positive for the ecosystem.

Oh – and if you want a dose of sarcasm beautifully written, check out Mark Cuban’s argument that he hopes Yahoo Crushes Facebook in its Patent Suit. His money quote:

“This is what patents are for, right ? To protect companies with original IP from smarter, faster, aggressive companies who catch the imagination of consumers and advertisers. What else could patents be for ?”

Mark’s serious comments are worth reading carefully.

“Seriously, there are industries where patents are used fairly to protect intellectual property. The technology industry is not one of them.

Change is needed. However, its not going to come from our government. The lobbyists have taken over. One of the symptoms of the illness patents have caused the technology industry is the explosion of lobbyists pushing the agenda of big patent portfolio holders. They are not going to let our lawmakers give an inch.

Rather than originating in Congress, its going to take a consumer uprising to cause change. What better way to create a consumer uprising than to financially cripple and possibly put out of business the largest social network on the planet ?”

March 13th, 2012 by     Categories: VC Post of the Day     Tags: , , , , ,

Wilson: The Board Of Directors – Selecting, Electing & Evolving

Fred Wilson (USV) must not be at SXSW because he’s got a great post up titled The Board Of Directors – Selecting, Electing & Evolving. While having a great post up and being at SXSW don’t have to be mutually exclusive, all of the other VC Posts that I saw this morning said something like “here’s where I’m going to be at SXSW – come find me.” Or they are tweeting “I’m still awake and I’m at an epic party.” Or they are asleep and hung over. But they are definitely not writing posts about boards of directors.

Fred talks about why a company should have a board, how the board evolved over time, and what the high level function of the board is. Having been on some boards with Fred, I hope he goes deeper in a series about boards on what boards should and should not do, especially in cases where the company is doing well, or not doing well.

As a bonus, he snuck in a tidbit near the end about the dynamics of the Twitter board. I wonder if anyone will notice.

March 12th, 2012 by     Categories: Board of Directors     Tags: , , ,

Suster: Never Negotiate Piecemeal. Here’s Why

There were very few VC posts today – I’m guessing most VC bloggers are either sleeping late, at SXSW (and possibly sleeping late due to their hangovers), or not blogging today (yeah – I know the third one is – well – a tautology).

Mark Suster (GRP) has a great post up titled Never Negotiate Piecemeal. Here’s Why. It’s great advice and perspective on the art of negotiating.

March 10th, 2012 by     Categories: VC Post of the Day     Tags: , , ,