Preface

One of the ways to finance a company is to raise venture capital. While only a small percentage of companies raise venture capital, many of the great technology companies that have been created, including Google, Apple, Cisco Systems, Yahoo!, Netscape, Sun Microsystems, Compaq, Digital Equipment Corporation, and America Online, raised venture capital early in their lives. Some of today's most significant entrepreneurial companies, such as Facebook, Twitter, Airbnb, LinkedIn, and Uber were also recipients of venture capital.

Over the past 25 years we've been involved in hundreds of venture capital financings. About 15 years ago, after a particularly challenging financing, we decided to write a series of blog posts to demystify the venture capital financing process. The result was the Term Sheet Series on Brad's blog (www.feld.com/archives/ category/term-sheet), which was the inspiration for this book.

As each new generation of entrepreneurs emerges, there is a renewed interest in how venture capital deals come together. We encounter many of these first-time entrepreneurs through our activities as venture capitalists at our firm, Foundry Group (www.foundrygroup.com), as well as our involvement in Techstars (www.techstars.com). We were regularly reminded that there was no definitive guide to venture capital deals and decided to create one.

In addition to describing venture capital deals in depth, we have tried to create context around the players, the deal dynamics, and how venture capital funds work. We have tossed in a section on negotiation, if only to provide another viewpoint into how venture capitalists (at least the two of us) might think about negotiation. We also took on the task of explaining the other term sheet that fortunate entrepreneurs will encounter-namely, the letter of intent to acquire your company.

With each subsequent edition of the book, we have added sections on alternative forms of financing, including convertible notes, crowdfunding, and initial coin offerings. Most recently, we've added sections on hiring a lawyer and an investment banker, as well as a detailed section on raising venture debt.

We have tried to take a balanced view between the entrepreneurs' perspective and the venture capitalists' perspective. As early stage investors, we know we are biased toward an early stage perspective, but we try to provide context that will apply to any financing stage. We also try to make fun of lawyers any chance we get.

We hope you find this book useful in your quest to create a great company.

Audience

When we first conceived this book, we planned to aim it at first-time entrepreneurs. We both have a long history of funding and working with first-time entrepreneurs and often learn more from them than they learn from us. Through our involvement in Techstars, we have heard a wide range of questions about financings and venture capital from first-time entrepreneurs. We have tried to do a comprehensive job of addressing those questions in this book.

As we wrote the book, we realized it was also useful for experienced entrepreneurs. A number of the entrepreneurs who read early drafts or heard about what we were writing gave us the feedback that they wished a book like this had existed when they were starting their first company. When we asked the question "Would this be useful for you today?" many said, "Yes, absolutely." Several sections, including those on negotiation and how venture capital funds work, were inspired by long dinner conversations with experienced entrepreneurs who told us that we had to write this stuff down, either on our blog or in a book. Well, here it is!

Before one becomes a first-time entrepreneur, one is often an aspiring entrepreneur. This book is equally relevant for the aspiring entrepreneur of any age. If you are in school and interested in entrepreneurship-whether in business school, law school, an undergraduate program, high school, or an advanced degree program-you will benefit from this book. We have each taught many classes on various topics covered in this book and hope it becomes standard reading for any class on entrepreneurship.

We were once inexperienced investors. We learned mostly by paying attention to more experienced investors, as well as actively engaging in deals. We hope this book becomes another tool in the tool chest for any aspiring investor, whether an angel investor or venture capitalist.

While we have aimed this book at entrepreneurs and investors, we hope that even lawyers will benefit from us putting these thoughts down in one place. At the minimum, we hope they recommend the book to their less experienced colleagues so that we can all speak a similar language around venture deals.

Finally, unintended beneficiaries of this book are the significant others of investors, lawyers, and entrepreneurs, especially those entrepreneurs actively involved in a deal. While our wives are quick to say, "Everything I've learned about venture came from overhearing your phone calls," we hope your life partner can dip into this book every now and then. This can be especially useful when an entrepreneur needs some spousal empathy while complaining about how a venture capitalist is forcing a participating preferred upon them.

Overview of the Contents

We begin with a brief history of the venture capital term sheet and a discussion of the different parties who participate in venture capital transactions. Following this is a section on preparing for fundraising and choosing the right lawyer.

We then discuss how to raise money from a venture capitalist, including determining how much money an entrepreneur should raise. This includes a section on how to properly prepare your company for fundraising and discusses the materials you will need before hitting the fundraising trail. As part of this, we explore the process that many venture capitalists follow to decide which companies to fund.

We then dive deeply into the particular terms that are included in venture capital term sheets. We have separated this topic into three chapters: terms related to economics, terms related to control, and all of the other terms. We strive to give a balanced view of the particular terms along with strategies for getting to a fair deal.

Following the chapters on terms, we discuss how convertible debt works and the pros and cons versus raising equity.

We next cover several alternative forms of fundraising, including product, equity, and token crowdfunding and how they differ from traditional venture capital deals. This is followed by a detailed section on venture debt.

We then go into a frank discussion about how venture capital firms operate, including how venture capitalists are motivated and compensated. We discuss how these structural realities can impact a company's chance of getting funded or could impact the relationship between the venture capitalist, her firm, and the entrepreneur after the investment is made.

Since the process of funding involves a lot of negotiation, the book contains a primer on negotiating and how particular strategies may work better or worse in the venture capital world. We attempt to help the entrepreneur learn ways to consummate a transaction in a venture capital financing while avoiding common mistakes and pitfalls.

Since there is no such thing as a standard venture capital financing, we cover different issues to consider that depend on the stage of financing a company is raising. We discuss some of the theories behind why any of these documents even exist so that you can understand the hidden incentives in the process.

As a bonus, we've tossed in a chapter about the other important term sheet that entrepreneurs need to know about: the letter of intent to acquire your company. We include a section on how and when to hire an investment banker to help you sell your company.

Finally, we end with a section on why term sheets even exist in the first place, along with tips concerning several common legal issues that many startups face. While it's not a dissertation on everything an entrepreneur needs to know, we've tried to include a few important things that we think entrepreneurs should pay attention to.

Whenever we introduce a new term, we italicize it. There is a glossary in the back of the book with short definitions for each of these italicized terms. Throughout the book we've enlisted a close friend and longtime entrepreneur, Matt Blumberg, the CEO of Return Path, to add his perspective. Whenever you see a sidebar titled "The Entrepreneur's Perspective," these are comments from Matt on the previous section.

Additional Materials

Along with this book, we have created some additional materials that you may want to review, including resources for use of this book in a classroom. These materials are all on the Venture Deals website at www.venturedeals.com (referred to in previous editions as the AsktheVC website at www.askthevc.com). And no, the venturedeals.com domain wasn't very expensive.

Venturedeals.com started out several years ago as a question-and-answer site that we managed. We've recently added a new section called "Resources," where the reader can find many standard forms of documents that are used in venture financings. They include the term sheet as well as all of the documents that are generated from the term sheet...