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Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist
Get the inside scoop on what venture capitalists want to see in your startup as you hit the fundraising trail.
This is the highly anticipated third edition of the best-selling book which has become the definitive resource for understanding venture capital fundraising. Whether you are an entrepreneur, lawyer, student or just have an interest in the venture capital ecosystem, Venture Deals is for you. The book dives deeply into how deals are constructed, why certain terms matter (and others don’t), and more importantly, what motivates venture capitalists to propose certain outcomes. You’ll see the process of negotiating from the eyes of two seasoned venture capitalists who have over 40 years of investing experience as VCs, LPs, angels, and founders. They will teach you how to develop a fundraising strategy that will be a win for all parties involved. This book is designed to bring transparency to the venture capital funding process and includes such topics And as in the previous editions, this book isn’t just a one-sided opinion from venture capitalists, but also has helpful commentary throughout from a veteran CEO who has raised many rounds of financing from many different investors. If you are ready to learn all the secrets and ins and outs of fundraising, Venture Deals is an essential read.
This is the highly anticipated third edition of the best-selling book which has become the definitive resource for understanding venture capital fundraising. Whether you are an entrepreneur, lawyer, student or just have an interest in the venture capital ecosystem, Venture Deals is for you. The book dives deeply into how deals are constructed, why certain terms matter (and others don’t), and more importantly, what motivates venture capitalists to propose certain outcomes. You’ll see the process of negotiating from the eyes of two seasoned venture capitalists who have over 40 years of investing experience as VCs, LPs, angels, and founders. They will teach you how to develop a fundraising strategy that will be a win for all parties involved. This book is designed to bring transparency to the venture capital funding process and includes such topics And as in the previous editions, this book isn’t just a one-sided opinion from venture capitalists, but also has helpful commentary throughout from a veteran CEO who has raised many rounds of financing from many different investors. If you are ready to learn all the secrets and ins and outs of fundraising, Venture Deals is an essential read.
First published July 5, 2011
2,562 people are currently reading
19.3k people want to read
About the author
Brad Feld
42 books2,444 followersBrad has been an early stage investor and entrepreneur since 1987. Prior to co-founding Foundry Group, he co-founded Mobius Venture Capital and, prior to that, founded Intensity Ventures. Brad is also a co-founder of Techstars.
Brad is a writer and speaker on the topics of venture capital investing and entrepreneurship. He’s written a number of books as part of the Startup Revolution series and writes the blogs Feld Thoughts and Venture Deals.
Brad holds Bachelor of Science and Master of Science degrees in Management Science from the Massachusetts Institute of Technology. Brad is also an art collector and long-distance runner. He has completed 25 marathons as part of his mission to finish a marathon in each of the 50 states.
Brad is a writer and speaker on the topics of venture capital investing and entrepreneurship. He’s written a number of books as part of the Startup Revolution series and writes the blogs Feld Thoughts and Venture Deals.
Brad holds Bachelor of Science and Master of Science degrees in Management Science from the Massachusetts Institute of Technology. Brad is also an art collector and long-distance runner. He has completed 25 marathons as part of his mission to finish a marathon in each of the 50 states.
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November 11, 2016
This is the second time in my life I find myself doing the rounds to collect proper money from investors. First time, more than fifteen years ago, I used the Bagley and Dauchy classic “Entrepreneur’s Guide to Business Law” and I thought it was pretty good. This book is quite simply in a different league.
The authors, seasoned VC entrepreneurs, have a gift for writing and that’s what carries you through the book. It’s all very serious, of course, but the writing style is as far from dry as you can imagine.
So I’m reading this and the only thing that keeps me from saying “OK, boys and girls, this covers everything, it’s the gospel” is the simple fact that if I was a VC I’d write a book that makes the case for the VC’s interests rather than the entrepreneur’s. So from where I stand, and I’m an entrepreneur, I’d want an entrepreneur to have written the book.
The authors actually go a long way toward addressing this concern: the summary for every section has actually been written by entrepreneur Matt Blumberg and rather often it’s hardly a summary; it emphasizes different point from Brad Feld’s, lending credibility to the book and making the reader more comfortable.
So this is basically a tremendous book and if you’re raising money you need to buy it and read it. If for some mysterious reason you don’t want a preview, on the other hand, look away now, because what follows is my summary of the key points:
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Chapter 1: “The Players”
• You need to be talking to a Managing Director or a General Partner
• You need a good, experienced lawyer: this is an awful place to skimp
• Mentors are great
Chapter 2: “How to Raise Money”
• You need an elevator pitch, an executive summary and a 10-slide powerpoint presentation
• “We haven’t seen a business plan in more than 20 years”
• Your financial model must get the potential expenses right; forget about nailing the revenues
• Do your homework on your VC and don’t press any clearly advertised wrong buttons
• If you feel like your VC is a proctologist, run for the hills
• Ask your VC for references from entrepreneurs
Chapter 3: “Overview of the Term Sheet:
• It’s not a letter of intent; it’s a blueprint for your future relationship with your VC
• Two things matter: economics and control
Chapter 4: “Economic Terms of the Term Sheet”
• Understand the difference between pre-money and post-money
• The VC will try to stick the options pool in the pre-money valuation
• You must have a Plan B to be able to negotiate good economic terms
• Competition aside, valuation will depend on the stage of the company, the team’s experience, the numbers, the suitability for the VC and the economic environment
• Liquidation Preference arises because VCs come in with preferred stock and means the VC gets its money first. This can be very dilutive if the next round is a down round.
• Fully Participating stock receives its participation amount and then shares in the liquidation process on an as-converted basis
• A cap can be put on the participation
• Under “pay to play” provisions, investors who do not participate in the next round get converted to common stock.
• Typically, employee stocks and options will vest over four years and disappear if somebody leaves
• Consideration must be given to treating the vesting as clawback with an IRS Section 83(b) election
• Acceleration of vesting upon change of control is a key feature, don’t leave it out!
• Antidilution provisions may be requested by the investor for the case where new common stock is created after the financing
Chapter 5: “Control Terms of the Term Sheet”
• At the beginning it will be 1. Founder, 2. CEO, 3. VC, 4. 2nd VC, 5. outside board member
• Don’t allow observers on your board
• Make sure the Protective Provisions allow you to borrow a reasonable amount of money
• Your investors need to vote as a single class
• There will be a drag-along provision (majority of shares on as-converted basis is the law in Delaware)
• There will be a conversion clause (so VCs can vote alongside common stock when they must)
• An automatic conversion clause can be there to force VCs to give up on their preferred ahead of a sale.
• If there is an automatic conversion threshold, it must be the same for all classes of stock.
Chapter 6: “Other Terms of the Term Sheet”
• Dividends might be requested by dorky VCs with Private Equity background.
• Noncumulative dividends that require board approval are OK. Supermajority even better.
• Redemption rights on the preferred (say after 5 years) can be put in by VCs that have the maturity of their fund in mind.
• Adverse Change Redemption Rights are evil, because there is no good definition for adverse change.
• Conditions Precedent to Financing should be avoided at all costs.
• Information Rights are A-OK.
• Registration Rights are A-OK. The world is good if you’re going public.
• Right of First Refusal had better be restricted to big investors.
• Right of First Refusal had better be pro-rata.
• Restriction on Sales is a clause that allows the company itself the right of first refusal.
• The Proprietary Information and Inventions Agreement is a clause you actually need.
• A Co-Sale Agreement allows investors to sell along with founders.
• A No-Shop Agreement had better expire automatically if the sale falls through and should have a carve-out for acquisitions.
• A standard Indemnification clause is good corporate hygiene, but it means you need to buy directors’ insurance.
• The Assignment clause needs to be read carefully: look for the loophole “assignment without transfer or the obligation under the agreements” which should not be there.
Chapter 8: “Convertible Debt”
• Convertible converts at a discount to the next financing.
• The purpose is to defer the discussion about the value of the company.
• A floor on the value of the stock protects the entrepreneur.
• A ceiling protects the investor, but can hurt everybody because it guides (caps!) the next investors on price.
• You should put a reasonable time horizon on an equity financing as a condition, or you will find the debt converted before you had time to do the financing.
• You should set upfront the minimum amount of financing that triggers the conversion.
• The interest rate on the debt should be as low as possible.
• There must be clauses regarding the sale of the firm while the debt is outstanding.
• Technically, a startup with convertible debt is insolvent!!!
• Warrants attached to debt are an alternative to the discount on convertible debt.
• Warrants should deliver the most recent class of stock at the most recent round’s price.
• Warrants are long-term (e.g. 10 year) call options.
• Warrants had better expire at a merger/acquisition unless they are exercised prior to the merger.
Chapter 9: “How Venture Capital Funds Work”
• Fees received from the LP are higher during the “Commitment Period” during which funds can still be committed to new investments.
• Follow-on investments can still be made during the investment term of the fund.
• VCs recycle their management fee into the LP if returns during the early life of the fund are good.
• If a fund is approaching the end of its life, you don’t want them to invest in you and most probably they can’t anyway.
• Ask your VC when they made their last investment. If it was more than 12 months ago, run for the hills.
Chapter 10: “Negotiation Tactics”
• Get a good result, do not kill your personal relationships and understand the deal you struck.
• This deal is not your lawyer’s.
• Find out who you are dealing with.
• Have a solid Plan B.
• Get the VC to tell you the top 3 things he wants (erm, good luck with that, I say)
• Always be transparent.
• Never make an offer first.
• Understand what market terms are.
• Bear a bad deal, because the acquirer might deliver you from it.
Chapter 11: “Raising Money the Right Way”
• Don’t ask for an NDA.
• Don’t carpet bomb VCs.
• No means no.
• Don’t be a solo founder.
• Don’t overemphasize patents.
Chapter 13: “Letters of Intent – The Other Term Sheet”
• (N.B. that means you’re selling the firm)
• They will beef up the options plan, right out of the offer they’ve shown you.
• An asset deal is crap: you have no assets but must still close the firm down.
• If they are offering illiquid stock, that’s something you’ll need to invest the time to evaluate yourself!
• You will have to give representations and warranties and if they are qualified by “to the extent currently known” you will have to sign them.
• Escrow is the practice whereby part of the offer is put to one side until some conditions have been met. This is a big burden, especially if the consideration is in stock. Fight it as much as possible.
• No-shop clauses should expire the moment the buyer terminates the process.
• Don’t negotiate your deal at the beginning (that looks awful) but don’t leave it last either.
Chapter 14: “Legal Things Every Entrepreneur Should Know”
• IP issues can kill a startup before you even really begin.
• Delaware
• Non-accredited investors have a right of rescission!
• Don’t forget to file an 83(b) Election
• When you write options to your employees, get them 409A - valuated
The authors, seasoned VC entrepreneurs, have a gift for writing and that’s what carries you through the book. It’s all very serious, of course, but the writing style is as far from dry as you can imagine.
So I’m reading this and the only thing that keeps me from saying “OK, boys and girls, this covers everything, it’s the gospel” is the simple fact that if I was a VC I’d write a book that makes the case for the VC’s interests rather than the entrepreneur’s. So from where I stand, and I’m an entrepreneur, I’d want an entrepreneur to have written the book.
The authors actually go a long way toward addressing this concern: the summary for every section has actually been written by entrepreneur Matt Blumberg and rather often it’s hardly a summary; it emphasizes different point from Brad Feld’s, lending credibility to the book and making the reader more comfortable.
So this is basically a tremendous book and if you’re raising money you need to buy it and read it. If for some mysterious reason you don’t want a preview, on the other hand, look away now, because what follows is my summary of the key points:
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Chapter 1: “The Players”
• You need to be talking to a Managing Director or a General Partner
• You need a good, experienced lawyer: this is an awful place to skimp
• Mentors are great
Chapter 2: “How to Raise Money”
• You need an elevator pitch, an executive summary and a 10-slide powerpoint presentation
• “We haven’t seen a business plan in more than 20 years”
• Your financial model must get the potential expenses right; forget about nailing the revenues
• Do your homework on your VC and don’t press any clearly advertised wrong buttons
• If you feel like your VC is a proctologist, run for the hills
• Ask your VC for references from entrepreneurs
Chapter 3: “Overview of the Term Sheet:
• It’s not a letter of intent; it’s a blueprint for your future relationship with your VC
• Two things matter: economics and control
Chapter 4: “Economic Terms of the Term Sheet”
• Understand the difference between pre-money and post-money
• The VC will try to stick the options pool in the pre-money valuation
• You must have a Plan B to be able to negotiate good economic terms
• Competition aside, valuation will depend on the stage of the company, the team’s experience, the numbers, the suitability for the VC and the economic environment
• Liquidation Preference arises because VCs come in with preferred stock and means the VC gets its money first. This can be very dilutive if the next round is a down round.
• Fully Participating stock receives its participation amount and then shares in the liquidation process on an as-converted basis
• A cap can be put on the participation
• Under “pay to play” provisions, investors who do not participate in the next round get converted to common stock.
• Typically, employee stocks and options will vest over four years and disappear if somebody leaves
• Consideration must be given to treating the vesting as clawback with an IRS Section 83(b) election
• Acceleration of vesting upon change of control is a key feature, don’t leave it out!
• Antidilution provisions may be requested by the investor for the case where new common stock is created after the financing
Chapter 5: “Control Terms of the Term Sheet”
• At the beginning it will be 1. Founder, 2. CEO, 3. VC, 4. 2nd VC, 5. outside board member
• Don’t allow observers on your board
• Make sure the Protective Provisions allow you to borrow a reasonable amount of money
• Your investors need to vote as a single class
• There will be a drag-along provision (majority of shares on as-converted basis is the law in Delaware)
• There will be a conversion clause (so VCs can vote alongside common stock when they must)
• An automatic conversion clause can be there to force VCs to give up on their preferred ahead of a sale.
• If there is an automatic conversion threshold, it must be the same for all classes of stock.
Chapter 6: “Other Terms of the Term Sheet”
• Dividends might be requested by dorky VCs with Private Equity background.
• Noncumulative dividends that require board approval are OK. Supermajority even better.
• Redemption rights on the preferred (say after 5 years) can be put in by VCs that have the maturity of their fund in mind.
• Adverse Change Redemption Rights are evil, because there is no good definition for adverse change.
• Conditions Precedent to Financing should be avoided at all costs.
• Information Rights are A-OK.
• Registration Rights are A-OK. The world is good if you’re going public.
• Right of First Refusal had better be restricted to big investors.
• Right of First Refusal had better be pro-rata.
• Restriction on Sales is a clause that allows the company itself the right of first refusal.
• The Proprietary Information and Inventions Agreement is a clause you actually need.
• A Co-Sale Agreement allows investors to sell along with founders.
• A No-Shop Agreement had better expire automatically if the sale falls through and should have a carve-out for acquisitions.
• A standard Indemnification clause is good corporate hygiene, but it means you need to buy directors’ insurance.
• The Assignment clause needs to be read carefully: look for the loophole “assignment without transfer or the obligation under the agreements” which should not be there.
Chapter 8: “Convertible Debt”
• Convertible converts at a discount to the next financing.
• The purpose is to defer the discussion about the value of the company.
• A floor on the value of the stock protects the entrepreneur.
• A ceiling protects the investor, but can hurt everybody because it guides (caps!) the next investors on price.
• You should put a reasonable time horizon on an equity financing as a condition, or you will find the debt converted before you had time to do the financing.
• You should set upfront the minimum amount of financing that triggers the conversion.
• The interest rate on the debt should be as low as possible.
• There must be clauses regarding the sale of the firm while the debt is outstanding.
• Technically, a startup with convertible debt is insolvent!!!
• Warrants attached to debt are an alternative to the discount on convertible debt.
• Warrants should deliver the most recent class of stock at the most recent round’s price.
• Warrants are long-term (e.g. 10 year) call options.
• Warrants had better expire at a merger/acquisition unless they are exercised prior to the merger.
Chapter 9: “How Venture Capital Funds Work”
• Fees received from the LP are higher during the “Commitment Period” during which funds can still be committed to new investments.
• Follow-on investments can still be made during the investment term of the fund.
• VCs recycle their management fee into the LP if returns during the early life of the fund are good.
• If a fund is approaching the end of its life, you don’t want them to invest in you and most probably they can’t anyway.
• Ask your VC when they made their last investment. If it was more than 12 months ago, run for the hills.
Chapter 10: “Negotiation Tactics”
• Get a good result, do not kill your personal relationships and understand the deal you struck.
• This deal is not your lawyer’s.
• Find out who you are dealing with.
• Have a solid Plan B.
• Get the VC to tell you the top 3 things he wants (erm, good luck with that, I say)
• Always be transparent.
• Never make an offer first.
• Understand what market terms are.
• Bear a bad deal, because the acquirer might deliver you from it.
Chapter 11: “Raising Money the Right Way”
• Don’t ask for an NDA.
• Don’t carpet bomb VCs.
• No means no.
• Don’t be a solo founder.
• Don’t overemphasize patents.
Chapter 13: “Letters of Intent – The Other Term Sheet”
• (N.B. that means you’re selling the firm)
• They will beef up the options plan, right out of the offer they’ve shown you.
• An asset deal is crap: you have no assets but must still close the firm down.
• If they are offering illiquid stock, that’s something you’ll need to invest the time to evaluate yourself!
• You will have to give representations and warranties and if they are qualified by “to the extent currently known” you will have to sign them.
• Escrow is the practice whereby part of the offer is put to one side until some conditions have been met. This is a big burden, especially if the consideration is in stock. Fight it as much as possible.
• No-shop clauses should expire the moment the buyer terminates the process.
• Don’t negotiate your deal at the beginning (that looks awful) but don’t leave it last either.
Chapter 14: “Legal Things Every Entrepreneur Should Know”
• IP issues can kill a startup before you even really begin.
• Delaware
• Non-accredited investors have a right of rescission!
• Don’t forget to file an 83(b) Election
• When you write options to your employees, get them 409A - valuated
June 24, 2023
Monopoly© the board game, venture capital edition, in real life and behind the scenes.
Plentiful billion dollar companies and high net worth individuals exist today because of venture capital. But, line-by-line, what are the exact structure, rules, guidelines, controls, and economics that made them so?
It really does seem like a fun real world game to try and play—what with all the characters and roleplaying and corresponding reward from all the risk, responsibility, and effort. Though I think the real reason why I liked this is because it was extremely insightful, practically, on a topic and industry that is shrouded in mystery yet plays such an important role. And it's surprising how much thought and effort can go into the mere 8 page or so term sheet document that comprises VC deals.
Perhaps one may never even end up using this information. However on a more abstracted level, the structure and approach of the book on such a topic is what is intriguing. The approach of introducing key players was very helpful, rather than jumping into details or mentioning solely the types of faceless organizations and entities that are involved in the process. That is a convenient universal lens to expediently understand groups of the world, just as understanding the tools of a trade may be another universal lens to expediently understand endeavors. Furthermore, exploring what real world contracts look like, a first for me, in the form of layers of conditionals and rules as they pertain to current and potential actions. Lastly, the various dynamics and relations of different parts.
Such knowledge is hard to come by, and I can recognize it when I come across it. This is simply a new standard of detail by which I shall seek compressed information for other topics of interest, and by which I shall judge other books.
Plentiful billion dollar companies and high net worth individuals exist today because of venture capital. But, line-by-line, what are the exact structure, rules, guidelines, controls, and economics that made them so?
It really does seem like a fun real world game to try and play—what with all the characters and roleplaying and corresponding reward from all the risk, responsibility, and effort. Though I think the real reason why I liked this is because it was extremely insightful, practically, on a topic and industry that is shrouded in mystery yet plays such an important role. And it's surprising how much thought and effort can go into the mere 8 page or so term sheet document that comprises VC deals.
Perhaps one may never even end up using this information. However on a more abstracted level, the structure and approach of the book on such a topic is what is intriguing. The approach of introducing key players was very helpful, rather than jumping into details or mentioning solely the types of faceless organizations and entities that are involved in the process. That is a convenient universal lens to expediently understand groups of the world, just as understanding the tools of a trade may be another universal lens to expediently understand endeavors. Furthermore, exploring what real world contracts look like, a first for me, in the form of layers of conditionals and rules as they pertain to current and potential actions. Lastly, the various dynamics and relations of different parts.
Such knowledge is hard to come by, and I can recognize it when I come across it. This is simply a new standard of detail by which I shall seek compressed information for other topics of interest, and by which I shall judge other books.
June 3, 2012
This book was OK and potentially very useful for anyone working through a term sheet when seeking venture capital. In that particular circumstance, I think that it is indeed a wonderful explanation of various factors. In fact, that is what the book set out to be. However, there was very limited real-world examples that gave a context for understanding the particular point being discussed. The subject is definitely difficult to speak about because of all of the legal protections and regulations regarding discussing information related to specific VC deals. Yet, it is the ability to navigate these regulations and still weave a compelling story that sets good writers apart from poor ones. In the end, I did not feel that I learned too much from the book because the writing was simply not up to the level that it should have been. It is a sort of legal commentary rather than helpful advice that can be easily digested by a non-lawyer. In a sense, they could have written a 30 page pamphlet and stated: "After all of our experience in the VC industry we have realized one thing, it is important to have a good lawyer who understands the particularities of VC firms and deals." After reading this book, I can honestly say that I don't think that it would made me feel any more comfortable in interactions with VC firms or angel investors.
August 11, 2013
This is one of those books that I wish I had read before forming our business. It is overwhelming to think about all the legal details that go into investment deals and the terminology has been foreign to me. This book cleared up the things I didn’t understand and explained in layman’s terms what these deals really mean, what I as an entrepreneur should worry about and which terms I should not really worry about. This book is now my go-to Bible for the investment deals we will enter as our business grows.
Here are my key takeaways from the book:
Read and understand every contract you sign. If that means the deal takes longer, so be it.
Know what terms are most important to you before you enter into a negotiation.
Don’t be afraid to negotiate.
Remember that these investors are going to be your business partners going forward. You want to have a good relationship with them. Do everything you can to foster that relationship.
Most importantly: hire a good lawyer, that you like and has experience in startup deals.
This book was not intimidating and made me feel so much more knowledgeable about the world I am entering into as an entrepreneur seeking investors. It is a must read for anyone even thinking about founding a business.
Here are my key takeaways from the book:
Read and understand every contract you sign. If that means the deal takes longer, so be it.
Know what terms are most important to you before you enter into a negotiation.
Don’t be afraid to negotiate.
Remember that these investors are going to be your business partners going forward. You want to have a good relationship with them. Do everything you can to foster that relationship.
Most importantly: hire a good lawyer, that you like and has experience in startup deals.
This book was not intimidating and made me feel so much more knowledgeable about the world I am entering into as an entrepreneur seeking investors. It is a must read for anyone even thinking about founding a business.
February 27, 2024
I would like to thank the authors of this book: Thank you! This is amazing!
May 12, 2023
In this book you learn about venture capital from start to finish. It was a very helpful book to get familiar with the specific language and terms. Also, it was nice that the authors included incentives of venture capitalists themselves. So you know what drives and motivates them, it helps you understand their thought proces. Would recommend if you'd consider any fundraising for a project.
January 28, 2019
If you are a first-time entrepreneur, this book might help you skip rookie mistakes!
Venture Deals is a must-read for any entrepreneur thinking about starting, or currently running, a venture-backed company.
It might take you a bit longer to read (it took me several months which is A LOT higher than the average time it takes me to read a book), that most business books, because of the level of detail you will find. Yet, every detail is valuable because when in need you'll be able to remember where to look for information before making an important decision that could impact the future of your company.
The author does a great job of sharing different perspectives so that you know what to expect in any situation. Nothing beats experience, but this book will definitely put you in a better position when dealing with investors, lawyers, boards, etc. You will be able to make better decisions thanks to this book.
Some of my highlights:
"If you are presented with a weak (or one-sided) confidentiality agreement, it could mean that the acquirer is attempting to learn about your company through the due diligence process and may or may not be intent on closing the deal."
"Creating a successful software business is about having a great idea and executing well, not about patents, in our opinion."
"There are only three things that matter when negotiating a financing: achieving a good and fair result, not killing your personal relationship getting there, and understanding the deal that you are striking."
Venture Deals is a must-read for any entrepreneur thinking about starting, or currently running, a venture-backed company.
It might take you a bit longer to read (it took me several months which is A LOT higher than the average time it takes me to read a book), that most business books, because of the level of detail you will find. Yet, every detail is valuable because when in need you'll be able to remember where to look for information before making an important decision that could impact the future of your company.
The author does a great job of sharing different perspectives so that you know what to expect in any situation. Nothing beats experience, but this book will definitely put you in a better position when dealing with investors, lawyers, boards, etc. You will be able to make better decisions thanks to this book.
Some of my highlights:
"If you are presented with a weak (or one-sided) confidentiality agreement, it could mean that the acquirer is attempting to learn about your company through the due diligence process and may or may not be intent on closing the deal."
"Creating a successful software business is about having a great idea and executing well, not about patents, in our opinion."
"There are only three things that matter when negotiating a financing: achieving a good and fair result, not killing your personal relationship getting there, and understanding the deal that you are striking."
July 13, 2020
Must read for any entrepreneur before a #VC fundraise.
Clear breakdowns of term sheets, valuations and the two most important parts of a VC deal - Economics and Control.
February 19, 2024
- There really are only two key things that matter in the actual term sheet negotiation—economics and control
- Associates are the the people in the firm who spend the most time with the capitalization table
- Venture partners or operating partners are experienced entrepreneurs who have a part-time relationship with the VC firms.
- The MDs and GPs are the ones who matter and who will make decisions about your company
- Many lawyers experienced with VC investments will cap their fees in advance of the deal ($5-20k for early stage financing)
- Make sure that the lawyer caps their fee
- While having mentors is never required, we strongly encourage entrepreneurs to find them
- Your goal when you are raising financing should be to get several term sheets
- Be convinced you will raise. If you aren’t, investors will smell this uncertainty on you; it’ll permeate your words and actions
- Before you hit the road, figure out how much money you are going to raise
- Focus on a length of time you want to fund your company to get to the next meaningful milestone
- That said, be careful not to over-specify the milestones that you are going to achieve—you don’t want them showing up in your financing documents as specific milestones that you have to attain.
- Be careful not to go out asking for an amount that is larger than you need, since one of the worst positions you can be in during a financing is to have investors interested, but be too far short of your goal.
- However, being able to say “I’m at $400,000 on a $500,000 raise and we’ve got room for one or two more investors” is a powerful statement. Ask for less
- We don’t believe in ranges in the fundraising process. Give a firm number
- At the minimum, you need a short description of your business, an executive summary, and a presentation
- Don’t over-design your information
- Focus on the content while making the presentation solid and able to stand on its own
- If you need to talk us through the pitch deck, you have lost the battle before you’ve started.
- Even if you are a very early-stage company, a prototype or demo is desirable (people like what they can play with)
- Work hard on the executive summary. Pack substance into it
- There are only a few key things most VCs look at to understand and get excited about a deal: the problem you are solving, the size of the opportunity, the strength of the team, the level of competition or competitive advantage that you have, your plan of attack, and current status.
- An introduction to a VC from an entrepreneur who knows both you and the VC is always most effective
- And never forget the simple notion that if you want money, ask for advice
- Your goal is to find a lead VC
- The other two categories—the “maybe” and the “slow no”—are the hardest to deal with.
- Realize that these VCs are not going to catalyze your investment. Find a lead
- The way that you get connected to a VC affects the process you go through
- Don’t get overly excited until there is a general partner or managing director at the firm paying attention to and spending real time with you
- Ask a VC for entrepreneurs the VC has backed whose companies haven’t worked out
- If a VC passes, politely insist on feedback as to why
- If you want to create a competitive process, allow at least six months to raise money
- Always ask what the process going forward is
- If your goal is to create a competitive process, never answer the question of who else you’re talking to
- There are two parts of closing: The first is the signing of the term sheet and the second is signing the definitive documents and getting the cash
- The term sheet is critical. All that matters are economics & control
- Economics refers to the return the investors will ultimately get in a liquidity event
- Control refers to the mechanisms that allow the investors either to affirmatively exercise control over the business or to veto certain decisions the company can make
- When companies are created, the founders receive common stock. However, when VCs invest in companies, they purchase equity and in the vast majority of cases receive preferred stock
- While price per share is the ultimate measure of what is being paid for the equity being bought, price is often referred to as valuation
- The pre-money valuation is what the investor is valuing the company at today, before investment, while the post-money valuation is simply the pre-money valuation plus the contemplated aggregate investment amount.
- Clarify if Vas are talking about pre or post money valuations (VCs usually mean post-money valuation)
- The typical early-stage company option pool ends up in a range of 10% to 20%. Sometimes option pool comes out of pre-money valuation. Be careful of this trap
- The best way to negotiate a higher price is to have multiple VCs interested in investing in your company
- Liquidation preference is super important - what happens in an acquisition. Investors can 1x, 2x, etc the money they get based on what they put in
- Common stock has voting rights but not liquidity preference (preference stock does)
- If participating, it means they participate in the common stock liquidity IN ADDITION to their preferred stock terms
- Participation has a lot of impact at relatively low outcomes and less impact at higher outcomes
- We believe that pay-to-play provisions are generally good for the company and its investors (essentially investors have to contribute to follow-on rounds if they don’t want their preferred shares to convert to common)
- The pay-to-play provision may not be appropriate, especially in early rounds if you have investors who generally do not participate in follow on rounds as a matter of business practice
- Vesting cliff is when your stock starts vesting. If you have a 1 yr cliff & leave before, none of your stock vests
- For founders’ stock, the unvested stuff just vanishes. For unvested employee options, it usually goes back into the option pool to be reissued to future employees
- Having one or two years’ worth of guaranteed transition on the part of an acquired management team is critical to an acquisition’s financial success
- VCs often sneak in additional economics for themselves by increasing the amount of the option pool on a pre-money basis (the increased option pool comes out of existing shareholders instead of new ones). To avoid this, just say “we think there’s enough but will provide full anti-dilution protection”
- While VCs often have less than 50% ownership of a company, they usually have a variety of control terms that effectively give them control of many activities of the company
- Be wary of board observers as they just take up seats at a table
- Protective provisions are effectively veto rights that investors have on certain actions by the company
- Have investors vote as a single class
- Usually preferred stock is converted to common when a company IPOs to just have 1 stock type
- Dividends matter a lot of in private equity, but not really in VC (relies on large investment amounts & low expected exit multiples)
- Do not accept an adverse change redemption clause
- Remember that you don’t necessarily have a deal just because you’ve signed a term sheet
- Have all employees, including founders, sign a proprietary IP clause before you do an outside venture financing
- Convertible debt happens when you set the stock price in a later round (a loan that converts to equity later, like an MFN)
- SAFE is a Simple Agreement for Future Equity (a convertible note/debt without interest
- The cap is an investor-favorable term that puts a ceiling on the conversion price of the debt (if you raise at a much higher valuation later, early investors can still say they invested in a much lower valuation)
- When a VC firm raises capital from an LP, they then make capital calls to get the cash, which and LP can’t really refuse
- The average firm raises a new fund every three or four years
- The real money that a VC makes, known as the carried interest, or carry, should dwarf the management fee (most VCs get 20% carry)
- GPs put their own money into a fund
- VCs definitely make more than 1 investment per year, & usually raise a new fund after 3-5 years
- Understand how old the fund is. If it’s really old they’ll pressure you for quick returns
- You should understand how much capital the firm reserves for follow-on investments per company
- All that really matters is: the valuation, stock option pool, liquidation preferences, board, and voting controls
- Know what you’re willing to concede on and what you’re not BEFOREHAND
- When VCs want things to move fast, move slow. When VCs want things to move slow, move fast
- At the beginning of a negotiation, ask what are the three most important terms are for them
- Anchor: pick a few points, state clearly what you want, and then stick to your guns
- Know beforehand when you will walk away
- Never share what other VCs you’re talking to or have given you a term sheet
- You should never make an offer first
- Don’t hire a lawyer from a top-tier law firm (overpriced & you’ll get a junior guy)
- Pretend meeting with VCs is like dating. Make them long for more & have a strong first impression (date)
- For VCs, no means no. They have an incentive to say maybe a lot, so if they say no, it’s no
- Many VCs just use precedent from earlier funding rounds, so early round terms matter a lot
- Try to have a clear lead investor who will be committed to your company and work hard for you, not 5 small checks
- Watch out for the participating preferred feature. This can screw you if you raise a lot of money
- Also collapse the protective provisions so all shareholders vote together
- With acquisition LOIs, all that matters is price and structure
- For acquisitions, Cash is king
- Escrow is money that the buyer is going to hang on to for some period of time to satisfy any issue that comes up post acquisition that is not disclosed in the purchase agreement
- Even if you pay for code written by someone else, you don’t own the code unless you get whoever wrote the code to sign a document saying that the code was “work for hire.”
- The most common lawsuits entrepreneurs face are ones around employment issues
- Everyone you hire should be an at-will employee
- Delaware is the best state for incorporation since it is very business-friendly
- If you are not going to raise any VC or angel money, an S Corp is the best structure (tax benefits & flexibility)
- With LLC it’s hard to grant equity to employees (they have membership units)
- If you are going to raise VC or angel money, a C Corp is the best (and often required) structure
- Only offer stock to accredited investors - very important as the SEC can screw you here
- File an 83(b) election within 30 days after receiving your stock in a company, you will almost always lose capital gains treatment of your stock when you sell it - very important or you pay double taxes
- Associates are the the people in the firm who spend the most time with the capitalization table
- Venture partners or operating partners are experienced entrepreneurs who have a part-time relationship with the VC firms.
- The MDs and GPs are the ones who matter and who will make decisions about your company
- Many lawyers experienced with VC investments will cap their fees in advance of the deal ($5-20k for early stage financing)
- Make sure that the lawyer caps their fee
- While having mentors is never required, we strongly encourage entrepreneurs to find them
- Your goal when you are raising financing should be to get several term sheets
- Be convinced you will raise. If you aren’t, investors will smell this uncertainty on you; it’ll permeate your words and actions
- Before you hit the road, figure out how much money you are going to raise
- Focus on a length of time you want to fund your company to get to the next meaningful milestone
- That said, be careful not to over-specify the milestones that you are going to achieve—you don’t want them showing up in your financing documents as specific milestones that you have to attain.
- Be careful not to go out asking for an amount that is larger than you need, since one of the worst positions you can be in during a financing is to have investors interested, but be too far short of your goal.
- However, being able to say “I’m at $400,000 on a $500,000 raise and we’ve got room for one or two more investors” is a powerful statement. Ask for less
- We don’t believe in ranges in the fundraising process. Give a firm number
- At the minimum, you need a short description of your business, an executive summary, and a presentation
- Don’t over-design your information
- Focus on the content while making the presentation solid and able to stand on its own
- If you need to talk us through the pitch deck, you have lost the battle before you’ve started.
- Even if you are a very early-stage company, a prototype or demo is desirable (people like what they can play with)
- Work hard on the executive summary. Pack substance into it
- There are only a few key things most VCs look at to understand and get excited about a deal: the problem you are solving, the size of the opportunity, the strength of the team, the level of competition or competitive advantage that you have, your plan of attack, and current status.
- An introduction to a VC from an entrepreneur who knows both you and the VC is always most effective
- And never forget the simple notion that if you want money, ask for advice
- Your goal is to find a lead VC
- The other two categories—the “maybe” and the “slow no”—are the hardest to deal with.
- Realize that these VCs are not going to catalyze your investment. Find a lead
- The way that you get connected to a VC affects the process you go through
- Don’t get overly excited until there is a general partner or managing director at the firm paying attention to and spending real time with you
- Ask a VC for entrepreneurs the VC has backed whose companies haven’t worked out
- If a VC passes, politely insist on feedback as to why
- If you want to create a competitive process, allow at least six months to raise money
- Always ask what the process going forward is
- If your goal is to create a competitive process, never answer the question of who else you’re talking to
- There are two parts of closing: The first is the signing of the term sheet and the second is signing the definitive documents and getting the cash
- The term sheet is critical. All that matters are economics & control
- Economics refers to the return the investors will ultimately get in a liquidity event
- Control refers to the mechanisms that allow the investors either to affirmatively exercise control over the business or to veto certain decisions the company can make
- When companies are created, the founders receive common stock. However, when VCs invest in companies, they purchase equity and in the vast majority of cases receive preferred stock
- While price per share is the ultimate measure of what is being paid for the equity being bought, price is often referred to as valuation
- The pre-money valuation is what the investor is valuing the company at today, before investment, while the post-money valuation is simply the pre-money valuation plus the contemplated aggregate investment amount.
- Clarify if Vas are talking about pre or post money valuations (VCs usually mean post-money valuation)
- The typical early-stage company option pool ends up in a range of 10% to 20%. Sometimes option pool comes out of pre-money valuation. Be careful of this trap
- The best way to negotiate a higher price is to have multiple VCs interested in investing in your company
- Liquidation preference is super important - what happens in an acquisition. Investors can 1x, 2x, etc the money they get based on what they put in
- Common stock has voting rights but not liquidity preference (preference stock does)
- If participating, it means they participate in the common stock liquidity IN ADDITION to their preferred stock terms
- Participation has a lot of impact at relatively low outcomes and less impact at higher outcomes
- We believe that pay-to-play provisions are generally good for the company and its investors (essentially investors have to contribute to follow-on rounds if they don’t want their preferred shares to convert to common)
- The pay-to-play provision may not be appropriate, especially in early rounds if you have investors who generally do not participate in follow on rounds as a matter of business practice
- Vesting cliff is when your stock starts vesting. If you have a 1 yr cliff & leave before, none of your stock vests
- For founders’ stock, the unvested stuff just vanishes. For unvested employee options, it usually goes back into the option pool to be reissued to future employees
- Having one or two years’ worth of guaranteed transition on the part of an acquired management team is critical to an acquisition’s financial success
- VCs often sneak in additional economics for themselves by increasing the amount of the option pool on a pre-money basis (the increased option pool comes out of existing shareholders instead of new ones). To avoid this, just say “we think there’s enough but will provide full anti-dilution protection”
- While VCs often have less than 50% ownership of a company, they usually have a variety of control terms that effectively give them control of many activities of the company
- Be wary of board observers as they just take up seats at a table
- Protective provisions are effectively veto rights that investors have on certain actions by the company
- Have investors vote as a single class
- Usually preferred stock is converted to common when a company IPOs to just have 1 stock type
- Dividends matter a lot of in private equity, but not really in VC (relies on large investment amounts & low expected exit multiples)
- Do not accept an adverse change redemption clause
- Remember that you don’t necessarily have a deal just because you’ve signed a term sheet
- Have all employees, including founders, sign a proprietary IP clause before you do an outside venture financing
- Convertible debt happens when you set the stock price in a later round (a loan that converts to equity later, like an MFN)
- SAFE is a Simple Agreement for Future Equity (a convertible note/debt without interest
- The cap is an investor-favorable term that puts a ceiling on the conversion price of the debt (if you raise at a much higher valuation later, early investors can still say they invested in a much lower valuation)
- When a VC firm raises capital from an LP, they then make capital calls to get the cash, which and LP can’t really refuse
- The average firm raises a new fund every three or four years
- The real money that a VC makes, known as the carried interest, or carry, should dwarf the management fee (most VCs get 20% carry)
- GPs put their own money into a fund
- VCs definitely make more than 1 investment per year, & usually raise a new fund after 3-5 years
- Understand how old the fund is. If it’s really old they’ll pressure you for quick returns
- You should understand how much capital the firm reserves for follow-on investments per company
- All that really matters is: the valuation, stock option pool, liquidation preferences, board, and voting controls
- Know what you’re willing to concede on and what you’re not BEFOREHAND
- When VCs want things to move fast, move slow. When VCs want things to move slow, move fast
- At the beginning of a negotiation, ask what are the three most important terms are for them
- Anchor: pick a few points, state clearly what you want, and then stick to your guns
- Know beforehand when you will walk away
- Never share what other VCs you’re talking to or have given you a term sheet
- You should never make an offer first
- Don’t hire a lawyer from a top-tier law firm (overpriced & you’ll get a junior guy)
- Pretend meeting with VCs is like dating. Make them long for more & have a strong first impression (date)
- For VCs, no means no. They have an incentive to say maybe a lot, so if they say no, it’s no
- Many VCs just use precedent from earlier funding rounds, so early round terms matter a lot
- Try to have a clear lead investor who will be committed to your company and work hard for you, not 5 small checks
- Watch out for the participating preferred feature. This can screw you if you raise a lot of money
- Also collapse the protective provisions so all shareholders vote together
- With acquisition LOIs, all that matters is price and structure
- For acquisitions, Cash is king
- Escrow is money that the buyer is going to hang on to for some period of time to satisfy any issue that comes up post acquisition that is not disclosed in the purchase agreement
- Even if you pay for code written by someone else, you don’t own the code unless you get whoever wrote the code to sign a document saying that the code was “work for hire.”
- The most common lawsuits entrepreneurs face are ones around employment issues
- Everyone you hire should be an at-will employee
- Delaware is the best state for incorporation since it is very business-friendly
- If you are not going to raise any VC or angel money, an S Corp is the best structure (tax benefits & flexibility)
- With LLC it’s hard to grant equity to employees (they have membership units)
- If you are going to raise VC or angel money, a C Corp is the best (and often required) structure
- Only offer stock to accredited investors - very important as the SEC can screw you here
- File an 83(b) election within 30 days after receiving your stock in a company, you will almost always lose capital gains treatment of your stock when you sell it - very important or you pay double taxes
January 11, 2023
The previous internship recommends books, and I finally read them!
The middle of the term sheet part is quite hard to read and get a clear understanding of, and because I lack practical experience and am also not a startup founder, it is pretty ambiguous for me.
However, the other part fits my experience to peep into VC and will have an overall rough understanding of this mysterious industry.
The middle of the term sheet part is quite hard to read and get a clear understanding of, and because I lack practical experience and am also not a startup founder, it is pretty ambiguous for me.
However, the other part fits my experience to peep into VC and will have an overall rough understanding of this mysterious industry.
March 20, 2025
For me was utterly essential and would have made a fool of myself yesterday without it
September 12, 2022
Very helpful guide to all the VC jargon you simply could not know without being taught - very much appreciate the accessibility of language used to explain some heady legal and negotiating concepts. The inclusion of both the VC and entrepreneur’s perspectives was also a very helpful way to make sense of each chapter. Will definitely be referencing this book again in future deals!
July 20, 2017
I got a chance to read this book through the course provided by the authors last two months.
The book is organized and informative, and this is the first book under this subject. The language used is not simple for all and the reader to be aware of some financial and law issues.
The book is organized and informative, and this is the first book under this subject. The language used is not simple for all and the reader to be aware of some financial and law issues.
December 29, 2018
A really great book, full of information and clear exemples that uncover lot of things from the unknown about startups and VC world.
If you are an entrepreneur, an investor or something in between, you should read the book.
If you are an entrepreneur, an investor or something in between, you should read the book.
November 8, 2020
If you are an entrepreneur (as I am), then this book is a gold mine. It has all the simple and complex details of venture financing and the perspective of the investors that two so many times miss.
An easy quick read with great information.
5 stars at a valuation of awesome!
An easy quick read with great information.
5 stars at a valuation of awesome!
November 12, 2021
If you’re about to pursue financing, read this book. It’s dense, so save it for right before so that the info is timely and remembered.
January 14, 2024
"Venture Deals" by Brad Feld and Jason Mendelson aims to be a comprehensive guide to the complex world of venture capital deals. The authors, both experienced in venture capital, attempt to demystify the process of funding and provide insights for entrepreneurs. However, the book falls short in delivering on its promise.
One of the primary issues with "Venture Deals" is its overly general approach. While it covers a broad range of topics, from term sheets to negotiations, it often skims the surface, lacking the depth and detail necessary for a thorough understanding. This general overview can leave readers, particularly those with some prior knowledge, wanting more specific information and practical guidance.
Moreover, the book sometimes assumes a level of pre-existing knowledge, which can be a barrier for complete beginners. The lack of detailed explanations and examples can make it challenging for newcomers to fully grasp the intricacies of venture capital deals.
On a positive note, the book is well-structured and easy to navigate, making it a decent starting point for those completely new to the field. However, for anyone looking for a deep dive or practical, in-depth advice on navigating venture deals, "Venture Deals" may be somewhat disappointing.
In conclusion, while "Venture Deals" offers a basic introduction to the world of venture capital, it doesn't quite deliver the detailed insights and practical advice that might be expected from a book touted as a definitive guide. It serves more as a primer rather than a comprehensive resource.
January 13, 2022
This was an absolutely excellent book! I listened to this 9 hour long book through Amazon's audible. The book teaches how the only two terms that matter are 'economics' and 'control'. I am starting to learn more about the world through an entrepreneur and VC's lens and this book does a good justice off opening up horizons for people who are starting out. I liked the way they gave examples of startups flourished and failed. It also explains which folks within a VC one must connect with to successfully get a deal out of the conversation. Terminologies specific to this world (term sheets, pre money, series A-B-C.....) were explained in an easy to understand manner. The authors were well experienced and this reflected in how the book was pretty concise. I read the 2019 version of the book.
February 12, 2025
I heard this book was the Bible of VC/startups, and I cannot emphasize enough how accurate the description is. Venture deals is super informative for both the entrepreneur and investor and is somehow still engaging due to Brad’s use of prescriptive advice and personal experiences (and probably my general interest in the space)
Bonus: contained surprisingly great relationship advice (ch. 3)
Bonus: contained surprisingly great relationship advice (ch. 3)
February 22, 2018
Amazing, must read for anyone involved in business - actual or wannabe founders, investors, employees. The kind of a book which makes you smarter.
March 24, 2018
There's nothing comparable to this book in the market. Very specific on term-sheets and other legal advice both entrepreneurs and VCs should know.
The book is somewhat a drag to read as it sometimes goes into legal details, but overall a very, very good book that only those who are working in the industry should read it.
There's plenty of other books about building great companies, valuation, how to divide stock options etc and all that you won't find in this book. But what you find in this book you won't find anywhere else.
The book is somewhat a drag to read as it sometimes goes into legal details, but overall a very, very good book that only those who are working in the industry should read it.
There's plenty of other books about building great companies, valuation, how to divide stock options etc and all that you won't find in this book. But what you find in this book you won't find anywhere else.
January 1, 2021
helpful in understanding basic VC math
February 3, 2022
Maybe my favorite business book I have read to date. I love how technical and applicable it is.
August 25, 2024
Useful but hard to read.
November 24, 2024
read for my VC class, pretty good at breaking down concepts when you don’t initially know much about the VC world.
December 30, 2024
Giving myself credit for reading this book for work….it was hard to get thru..I’ll leave it at that (my lawyer made me write that)
June 17, 2019
Livro sobre as circunstâncias e minúcias envolvendo o financiamento de startups, escrito por dois capitalistas de investimentos de risco. Obra objetiva, bem humorada (recheada de piadas sobre advogados) e que serve de boa orientação aos empreendedores sobre as questões legais, burocráticas e de negociação necessárias para o sucesso de suas empresas. Nem tudo se aplica à realidade econômica e jurídica brasileira. Ainda assim, ‘Venture Deals’ mostra a questão de investimento em startups sob a ótica de quem está do outro lado da mesa – e a capacidade de enxergar o mundo pelas lentes do outro é uma das habilidades mais importantes que um empreendedor possa vir a desenvolver.
Read
April 22, 2021Great book if somewhat dry material. I listened to this on Audible, and did the online course
March 5, 2019
Learned something new.
This book is for US-based entrepreneurs not common folks like myself.
This book is for US-based entrepreneurs not common folks like myself.
April 3, 2017
made the venture terms and legalese around them easier to understand. must read for the first time entrepreneur going to raise venture investment.
This entire review has been hidden because of spoilers.
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