Venture Hacks

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Institutional Knowledge

“It’s Standard”

Read a blog post

“If Slide is worth $550M...”

• Two + termsheets

• Independent

• Credible investors

• Create a market for your shares!

Leverage

“Raising venture capital is the art of younger men seducing older men”

- Anonymous

The Timeless Art

• Social Proof - “We’re meeting Sequoia next week”

• Authority - “Marc Andreesen is an angel”

• Scarcity - “Only room for one investor in this round”

• Desirability...

Five Quick Tips

• Great team (check the mirror)

• Pick a big market (now!)

• Even angels don’t fund niche plays

• Do something hard

• Have a plan for distribution

• Stay close to the money

Your 50-page business plan doesn’t matter

• One-liner; executive summary

• 10 slides

• Financials; micro-economics

The Pitch

The Approach

Get introduced...

...to the Partner...

...from someone they respect...

...at roughly the same time.

Synonyms for “NO”

“Come back when you have more progress”

“We need to see a CEO”

“NO”

“Maybe” “Later”

“It’s not you, it’s me”

“We’ll follow a credible lead”

“Value Add?”

Smart money

• Wisdom, not Intelligence and Energy

Money

Dumb Money

• Most likely to trumpet value add

Unbundle control, advice, and money - advisors are a bargain!

1. The Board of Directors

Valuation is temporary

Control is forever

“Trust, but Verify”

- Ronald Reagan

“The line between good and evil is permeable and almost anyone can be induced to cross it

when pressured by situational forces.”

Philip Zimbardo,

Stanford Prison Experiment

Rules of Thumb

• Make the Board Composition Proportional to ownership

• Independents usually aren’t

• Create a new seat for a new CEO

• Control is a one way street, from Common to Preferred

2. Valuation

Learn to signal gracefully

Purely supply and demand

Ignore outliers

Money has karma too!

3. The Option Pool ShuffleConvert apples-to-apples

Take the post-money option shares out of the pre-money

$6M pre-money$4M raised

25% post-money pool=

$3.5M pre-money

4. Vesting is Testing

With board control, it’s a founder issue

4 years, some credit, single trigger, double trigger

5. Liquidation and Anti-Dilution

• “Standard” is 1x, Broad-Based Weighted Average

• Designed to protect investors from quick flips and overpriced rounds

• Can change the terms dramatically!

• Great potential for mischief in private-private transactions

6. Protective Provisions

AKA The Fine Print

Protect minority shareholders

Hack 1: Sale ok above a certain price

Hack 2: Fundraising ok above a certain price

7. Expiration and Non-Disclosure

“We made a commitment to the other investors to give them time to do their diligence”

Either the termsheet is binding or it’s not...

...but it’s very bad form to shop

8. Counsel

Get your own advocate

There are “entrepreneur friendly” ones available

Draft the docs

Cap the fees

9. The New, New Thing

• RoFR - Spend now, pay later

• Super Pro-Rata - Huge option value, negative incentives

• One-sided confidentiality

• One-sided binding termsheet (pending diligence!) - placeholder

• Stock repurchase at FMV

10. Don’t Forget...

83(b)

Right to transfer / diversify

Founder Preferred

In Parting

• Line up your options

• Keep control

• Friendly investors don’t deliver hostile termsheets!

• Raising money is the easy part. Returning it...

• nandn@venturehacks.com