Venture Deals

Foreword xi Preface xiii Acknowledgments xix Introduction: The Art of the Term Sheet 1 1 The Players 5 The Entrepreneur 5 The Venture Capitalist 6 The Angel Investor 8 The Syndicate 10 The Lawyer 11 The Mentor 13 2 How to Raise Money 15 Do or Do Not; There Is No Try 15 Determine How Much You Are Raising 16 Fund-Raising Materials 17 Due Diligence Materials 23 Finding the Right VC 23 Finding a Lead VC 25 How VCs Decide to Invest 26 Closing the Deal 28 3 Overview of the Term Sheet 31 The Key Concepts: Economics and Control 32 4 Economic Terms of the Term Sheet 35 Price 35 Liquidation Preference 41 Pay-to-Play 47 Vesting 50 Employee Pool 54 Antidilution 55 5 Control Terms of the Term Sheet 61 Board of Directors 61 Protective Provisions 63 Drag-Along Agreement 68 Conversion 70 6 Other Terms of the Term Sheet 73 Dividends 73 Redemption Rights 75 Conditions Precedent to Financing 77 Information Rights 79 Registration Rights 80 Right of First Refusal 83 Voting Rights 84 Restriction on Sales 85 Proprietary Information and Inventions Agreement 86 Co-Sale Agreement 87 Founders' Activities 88 Initial Public Offering Shares Purchase 89 No-Shop Agreement 90 Indemnification 93 Assignment 93 7 The Capitalization Table 95 8 Convertible Debt 99 Arguments For and Against Convertible Debt 100 The Discount 102 Valuation Caps 103 Interest Rate 104 Conversion Mechanics 105 Conversion in a Sale of the Company 107 Warrants 108 Other Terms 110 Early Stage versus Late Stage Dynamics 111 Can Convertible Debt Be Dangerous? 112 9 How Venture Capital Funds Work 115 Overview of a Typical Structure 115 How Firms Raise Money 117 How Venture Capitalists Make Money 118 How Time Impacts Fund Activity 122 Reserves 124 Cash Flow 126 Cross-Fund Investing 127 Departing Partners 127 Fiduciary Duties 128 Implications for the Entrepreneur 128 10 Negotiation Tactics 129 What Really Matters? 129 Preparing for the Negotiation 130 A Brief Introduction to Game Theory 132 Negotiating in the Game of Financings 134 Negotiating Styles and Approaches 136 Collaborative Negotiation versus Walk-Away Threats 139 Building Leverage and Getting to Yes 140 Things Not to Do 142 Great Lawyers versus Bad Lawyers versus No Lawyers 145 Can You Make a Bad Deal Better? 145 11 Raising Money the Right Way 149 Don't Ask for a Nondisclosure Agreement 149 Don't Email Carpet Bomb VCs 150 No Often Means No 150 Don't Ask for a Referral If You Get a No 150 Don't Be a Solo Founder 151 Don't Overemphasize Patents 152 12 Issues at Different Financing Stages 153 Seed Deals 153 Early Stage 154 Mid and Late Stages 154 Other Approaches to Early Stage Deals 155 13 Letters of Intent--The Other Term Sheet 157 Structure of a Deal 158 Asset Deal versus Stock Deal 161 Form of Consideration 163 Assumption of Stock Options 164 Representations, Warranties, and Indemnification 167 Escrow 169 Confidentiality/Nondisclosure Agreement 170 Employee Matters 171 Conditions to Close 172 The No-Shop Clause 173 Fees, Fees, and More Fees 174 Registration Rights 175 Shareholder Representatives 176 14 Legal Things Every Entrepreneur Should Know 179 Intellectual Property 179 Employment Issues 181 State of Incorporation 182 Accredited Investors 182 Filing an 83(b) Election 183 Section 409A Valuations 184 Authors' Note 187 Appendix A: Sample Term Sheet 189 Appendix B: Sample Letter of Intent 209 Appendix C: Additional Resources 217 Glossary 221 About the Authors 229 Index 231 Excerpt from Startup Communities 237