This is a summary review of Venture Deals containing key details about the book.
What is Venture Deals About?
In Venture Deals, the authors and driving force behind the Foundry Group—a venture capital firm focused on investing in early-stage information technology companies—they have been involved in hundreds of venture capital financings. Their investments range from small startups to large Series A venture financing rounds. The new edition of Venture Deals continues to show fledgling entrepreneurs the inner-workings of the VC process, from the venture capital term sheet and effective negotiating strategies to the initial seed and the later stages of development.
Who is the author of Venture Deals?
Brad Feld is an American entrepreneur, author, blogger, and venture capitalist at Foundry Group in Boulder, Colorado, a firm he started with partners Seth Levine, Ryan McIntyre, and Jason Mendelson. Feld began financing technology startups in the early 1990s, first as an angel and later an institutional investor.
Jason Mendelson is a venture capitalist, startup co-founder, general counsel, and software engineer. Today he is an author, musician (under the name Jace Allen), philanthropist, and is very active in the criminal justice reform ecosystem.
How long is Venture Deals?
- Print length: 219 pages
What genre is Venture Deals?
Business, Entrepreneurship, Finance
What are good quotes from Venture Deals?
“Failure is a key part of entrepreneurship, but, as with many things in life, attitude impacts outcome”
“as you'll learn, there really are only two key things that matter in the actual term sheet negotiation—economics and control.”
“What's wrong with getting great terms? If you can't back them up with performance when you raise your next round, you may find yourself in a difficult position with your original investor. For example, assume you are successful getting a valuation that is significantly ahead of where your business currently is. If your next round isn't at a higher valuation, you are going to be diluting your original shareholders—the investors who took a big risk to fund you during the seed stage. Either you'll have to make them whole or, worse, they'll vote to block the new financing. This is especially true in cases with unsophisticated seed investors who were expecting that, no matter what, the next round price would be higher.”
“In 1957, the venture capital industry was just being created. At the time, the investor community in the United States was uninterested in investing in computer companies, as the last wave of computer-related startups had performed poorly and even large companies were having difficulty making money in the computer business. We can envision the frustration of DEC’s cofounders, Ken Olson and Harlan Anderson, as the investors they talked to rejected them and their fledgling idea for a business. We can also imagine their joy when Georges Doriot, the founder of American Research and Development Corporation, offered to fund them. After a number of conversations and meetings, Doriot sent Olson and Anderson a letter expressing his interest in investing, along with his proposed terms. Today, this document is called the term sheet.”
“In either case, before you jump through hoops providing this information, make sure a partner-level person (usually a managing director or general partner) is involved and that you aren’t just the object of a fishing expedition by an associate.”
“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. Summary financials, use of proceeds, and milestones are also important. Most good investor presentations can be done in 10 slides or fewer.”
“The only thing that we know about financial predictions of startups is that 100 percent of them are wrong. If you can predict the future accurately, we have a few suggestions for other things you could be doing besides starting a risky early stage company. Furthermore, the earlier stage the startup, the less accurate any predications will be. While we know you can't predict your revenue with any degree of accuracy (although we are always very pleased in that rare case where revenue starts earlier and grows faster than expected), the expense side of your financial plan is very instructive as to how you think about the business. You can't predict your revenue with any level of precision, but you should be able to manage your expenses exactly to plan. Your financials will mean different things to different investors. In our case, we focus on two things: (1) the assumptions underlying the revenue forecast (which we don't need a spreadsheet for—we'd rather just talk about them) and (2) the monthly burn rate or cash consumption of the business. Since your revenue forecast will be wrong, your cash flow forecast will be wrong. However, if you are an effective manager, you'll know how to budget for this by focusing on lagging your increase in cash spend behind your expected growth in revenue.”
“Most contemporary option plans have provisions whereby all granted options fully vest immediately prior to an acquisition should the plan and/or options underneath the plan not be assumed by the buyer. While this clearly benefits the option holders and helps incentivize the employees of the seller who hold options, it does have an impact on the seller and the buyer. In the case of the seller, it will effectively allocate a portion of the purchase price to the option holders. In the case of the buyer, it will create a situation in which there is no forward incentive for the employees to stick around since their option value is fully vested and paid at the time of the acquisition, resulting in the buyer having to come up with additional incentive packages to retain employees on a going-forward basis. Many lawyers will advise in favor of a fully vesting option plan because it forces the buyer to assume the option plan, because if it did not, then the option holders would immediately become shareholders of the combined entities. Under the general notion that fewer shareholders are better, this acceleration provision motivates buyers to assume option plans. This theory holds true only if there is a large number of option holders. In the past few years we've seen cases where”
“Outside board members are usually compensated with stock options—just like key employees—and are often invited to invest money in the company alongside the VCs.”
“A lot of people rely on the same arguments over and over again when negotiating. People who negotiate regularly, including many VCs and lawyers, try to convince the other side to acquiesce by stating, “That's the way it is because it's market.” We love hearing the market argument because then we know that our negotiating partner is a weak negotiator. Saying that “it's market” is like your parents telling you, “Because I said so,” and you responding, “But everyone's doing it.” These are elementary negotiating tactics that should have ended around the time you left for college.”
“If you feel like your VC is a proctologist, run for the hills.”
“When we meet people who say they are “trying to raise money,” “testing the waters,” or “exploring different options,” this not only is a turnoff, but also often shows they've not had much success. Start with an attitude of presuming success. If you don’t, investors will smell this uncertainty on you; it'll permeate your words and actions.”
What are the chapters in Venture Deals?
Chapter 1: The Players
Chapter 2: Preparing for Fundraising
Chapter 3: How to Raise Money
Chapter 4: Overview of the Term Sheet
Chapter 5: Economic Terms of the Term Sheet
Chapter 6: Control Terms of the Term Sheet
Chapter 7: Other Terms of the Term Sheet
Chapter 8: Convertible Debt
Chapter 9: The Capitalization Table
Chapter 10: Crowdfunding
Chapter 11: Venture Debt
Chapter 12: How Venture Capital Funds Work
Chapter 13: Negotiation Tactics
Chapter 14: Raising Money The Right Way.
Chapter 15: Issues at Different Financing Stages
Chapter 16: Letters of Intent: The Other Term Sheet
Chapter 17: How to Engage an Investment Banker
Chapter 18: Why Do Term Sheets Even Exist?
Chapter 19: Legal Things Every Entrepreneur Should Know
Tal Gur is a location independent entrepreneur, author, and impact investor. After trading his daily grind for a life of his own daring design, he spent a decade pursuing 100 major life goals around the globe. His most recent book and bestseller, The Art of Fully Living - 1 Man, 10 Years, 100 Life Goals Around the World, has set the stage for his new mission: elevating society to its abundance potential.