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 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 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 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 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

It’s Monday and our friendly neighborhood VCs stored up their posts over the weekend and launched a few with a vengeance. Today, we have three great ones.

Roger Ehrenberg (IA) writes about mentors in his post Mentors: an essential engine for growth. While he wrote it on Saturday, it’s still applicable on Monday.

Fred Wilson (USV) has his normal MBA Mondays series with a guest post from Andy Sack titled Revenue Based Financing. It’s an advertorial for Andy’s firm Lighter Capital but is a really good explanation of how revenue based financing works.

Charlie O’Donnell (First Round Capital) wraps up our posts of the day with a dynamite one titled 10 Misperceptions About Venture Capital.

I love this post from Bryce Roberts (OATV) titled You’re Doing It All Wrong.

Every great company I’ve ever worked with has its own style, personality, approach, strengths, weaknesses, and quirks. Experience – and inexperience – when combined with an amazing new opportunity, creates really unique characteristics that – over time – mix with other company DNA to create new characteristics. Funny – just like humans.

This is going to be fun. Rob Go (NextView) is taking on “Startup Jargon” with a new series. His first post is about Disruption, a word I never manage to type correctly the first time (I always type it as distruption.)

Many moons ago Fred Wilson wrote a great blog series on VC Cliches. It’s timeless. Let’s hope Rob lives up to Fred’s standard with the Startup Jargon series. Go Rob Go (sorry – couldn’t help myself on that one.)

We’ve got Fred Wilson blogging the incredible MBA Mondays series. I (Brad Feld) have started a Finance Friday series. And now Fred’s partner Albert Wenger has started a Tech Tuesday series.

Albert is a hard core developer turned VC. He’s started five companies, has an undergrad degree in Computer Science from Harvard and has a Ph.D. in Information Technology from MIT. Yes – he codes. His first post in the new series, Tech Tuesdays: Computing’s Building Blocks (Overview), is up.

Wednesday and Thursday are still available? Anyone out there ready to take them on?

And there you have it. We’ve completed our series on convertible debt and hope that you enjoyed it. If we ever get around to writing a second edition of Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist we’ll be sure to include this as well.

If you go to the resources section of Ask the VC we’ve included standard forms used in a variety of venture deals. As of this posting, we’ll include some standard convertible debt documents subject to the disclaimer that we aren’t you lawyers and make no reps or warranties with respect to these documents, so use at your own risk.

The post of the day is from Scott Weiss (Andreesseen Horowitz) titled Looking Bigger.

Scott’s a new VC blogger – I’ve gotten to know him over the past few years on the Return Path board and he’s a dynamite thinker. He’s got amazingly useful experience (and stories) from his last company – IronPort – and this post is a good example of his insights which are backed up with real experience.

I expect to see Scott, as well as his partners Ben Horowitz, Marc Andreessen, John O’Farrell, and Jeff Jordan at A16Z who are all blogging, show up in the VC Post of the Day on a regular basis.

Once again we continue our series on convertible debt deals. Today’s subject is early versus late stage dynamics.

Traditionally, convertible debt was issued by mid to late stage startups that needed a financing to get them to a place where they believed they could raise more money. Thus, these deals were called “bridge financings.”

The terms were basically the same unless the company was fairing poorly and there was doubt about the ability to raise new capital and / or the bridge was to get the company to an acquisition or even orderly shutdown. In these cases, one saw terms like liquidations preferences and in some cases changes to board and / or voting control come into play. Some of these bridge loans also contained terms like pay to play.

Given the traditional complexity and cost of legal fees associated with preferred stock financings, however, convertible debt became a common way to make seed stage investments as it tended to be simpler and less expensive from a legal perspective. Over time, equity rounds have become cheaper to consummate and the legal fees argument doesn’t hold much weight these days. In the end, the main force driving the use of convertible debt in early stage companies is the parties’ desire to avoid setting a valuation.

Well – I fell off that particular horse. That would be the “I’ll blog daily about the best VC blog post of the past 24 hours.” I could make some snarky comment about how there weren’t any for the last few weeks, but that wouldn’t be true. I just fell of the horse. But yesterday, when I was at an SVB event talking to a bunch of SVB people, a long time friend said “thanks so much for writing the VC Post of the Day – it saves me a ton of time looking through all the VC blog posts.” So I got back on the horse.

Today’s post of the day is from Nic Brisbourne (DFJ Esprit) and it titled What is anti-dilution/downround protection? Nic covers narrow-based, broad-based, and full ratchet anti-dilution with real examples using real math.

Note to self: that was easy – five minutes, done.

Earlier in the convertible debt series we talked about the “discounted price to the next round” approach to providing a discount on convertible debt. The other approach to a discount is to “issue warrants”. This approach is more complex and usually only applies to situations where the company has already raised a round of equity, but it still pops up in early stage deals. If you are doing a seed round, we encourage you not to use this approach and save some legal fees. However, if you are doing a later stage convertible debt round, or your investors insist on you issuing warrants, here’s how it works.

Assume that once again the investor is investing $100,000 and receives warrant coverage in the amount of 20% of the amount of the convertible note. In this case the investor will get a warrant for $20,000.

This is where it can get a little tricky. What does $20,000 worth of warrants mean? A warrant is an option to purchase a certain number of shares at a pre-determined price. But how do you figure out the number of warrants and the price that the warrants will be at? There are numerous different ways to calculate this, such as:

1. $20,000 worth of common stock at the last value ascribed to either the common or preferred stock;
2. $20,000 worth of the last round of preferred stock at that’s rounds price of the stock; or
3. $20,000 worth of the next round of preferred stock at whatever price that happens to be.

As you can see, the actual percentage of the company associated with the warrants can vary greatly depending on the price of the security that underlies it. As a bonus, the particular ownership of certain classes may affect voting control of a particular class of stock.

If there is a standard, it’s the second version where the warrants are attached to the prior preferred stock round. If there is no prior preferred, then one normally sees the stock convert to the next preferred round unless an acquisition of the company occurs before a preferred round is consummated and in that case, it reverts to the common stock.

For example, assume that the round gets done at $1.00 / share, just like in the previous example. The investor who holds a $100,000 convertible note will get $20,000 of warrants, or 20,000 warrants, at an exercise price of $1.00, to go along with the 100,000 shares received in the financing from the conversion of the note.

Warrants have a few extra terms that matter.

Term Length: The length of time the warrants are exercisable which is typically five to ten years. Shorter is better for the entrepreneur and company. Longer is better for the investor.

Merger Considerations: What happens to the warrants in the event the company is acquired? We can’t opine more strongly that all warrants should expire at a merger unless they are exercised just prior to the transaction. In other words, the warrant holder must decide to either exercise or give up the warrants if the company is acquired. Acquiring companies hate buying companies that have warrants survive a merger and allow the warrant holder to buy equity in the acquirer. Many a merger have been held up as warrants with this feature have upset the potential acquirer and thus as part of the closing requirements mandated that the company go out and repurchase and / or edit the terms of the warrants. This is not a good negotiating spot for the company to find itself in. It will have to pay off warrant holders while disclosing the potential merger (so the company will have little leverage) and at the same time will have a sword over its head by the acquirer until the issue is resolved.

Original Issue Discount: This is an accounting issue that is boring, yet important. If a convertible debt deal includes warrants, the warrants must be paid for separately in order to avoid the OID issue. In other words, if the debt is for $100,000 and there is 20% warrant coverage, the IRS says that the warrants themselves have some value. If there is no provision for the actual purchase of the warrants, the lender will have received an “original issue discount” (OID) which says that the $100,000 debt was issued at a “discount” since the lender also received warrants. The issue is that part of the $100,000 principal repaid will be included as interest to the lender, or even worse, it will be accrued as income over the life of the note even before any payments are made. The easy fix is paying something for the warrants, which usually is an amount in the low thousands of dollars.

The difference between warrants and discounts is probably insignificant for the investor. We suppose if the investor is able to get warrants for common stock, then perhaps the ultimate value of warrants may outweigh the discount, but it’s not clear. As evidenced by the number of words above, warrants add a fair amount of complexity and legal costs to the mix. On the other hand, some discounts will include valuation caps (more on this in our next post) and that can create some negative company valuation ramifications. Warrants completely stay away from the valuation discussion.

Finally, in no case should an entrepreneur let an investor double dip and receive both a discount and warrants. That’s not a reasonable position for an investor to take – he should either get a discount or get warrants.

We’ve been flattered through the years to hear that several highly acclaimed universities have used our term sheet series to teach business, law and engineering students the ins and outs of the venture financing term sheet.  With the release of our book, Venture Deals:  Be Smarter Than Your Lawyer and Venture Capitalist, we’ve begun to hear that folks are using our book in the classroom, as well.  The book is much more broad than the term sheet series in that it discusses fundraising, negotiation tactics and potentially most importantly, how VC firms are organized and incentivized, thus providing a never-seen-before look into the inner workings of venture firms.

Jason co-teaches a class at the University of Colorado Law School called VC 360 with professor Brad Bernthal.  They’ve been teaching the class for four years now and both enjoyed teaching from the book, rather than cobbling together a disjointed coursepack on the subject matter.  (Okay, we are biased, but take our word for it).

We’ve also learned that Woody Benson and Philip Lowe are teaching a course at Bentley University using the book.

With that in mind, we’ve created a new page at AskTheVC.com: Teaching.  To start, the University of Colorado and Bentley University have open sourced their syllabi and we welcome other educators to join us by posting theirs as well.  If you want to get involved, just leave a comment and we’ll get back to you.

We’ve also created a forum in case we get enough participation that we can share stories and issues about teaching from the book. Finally, Brad Bernthal and us will be writing a teacher manual for the book to help future use in the education ecosystem.

Thanks Philip and Woody on being our first partners!