The book “Venture Deals” is co-authored by Brad Feld (from the Foundry Group and TechStars) and Jason Mendelson (also of the Foundry Group). Prefaced by the tag line “Be smarter than your lawyer and venture capitalist,” the book aims to provide a general overview to the venture capital fundraising process for startup founders and employees, lawyers, and other venture capitalists.
Overall, I enjoyed reading this book. I read this book coming from a fairly limited understanding of finance and the basics of venture capital fundraising so I felt this book provided a solid understanding of the key players, vocabulary, and issues while also serving as a good reference document for the future. The book is fairly short, including a fairly extensive Appendix with example documents such as terms sheets and letters of intent. It was a relatively quick read and I’m sure I will re-read specific sections, if not the entire thing, again in the future.
A significant portion of the book focuses on various aspects of the term sheet, while the remaining sections detail topics such as alternative fundraising options, venture capital fund operations, negotiating tactics, and basic legal guidance. The book gets fairly technical in some portions in order to reinforce key concepts with detailed examples, however, these details aren’t overwhelmingly complex. In addition to the author’s perspective on the fundraising process, they also added comments from Matt Blumberg, CEO of Return Path in separate text boxes called “The Entrepreneur’s Perspective.” These are pretty useful as a summary of the key points and have some valuable additional insight.
For the rest of this post, I’m just going to highlight some of the quotes or concepts I found interesting or relevant as I progressed through the book. Some commentary is added where I felt it was relevant, but a lot of the content can stand alone.
The passage below is fairly common sense advice, but it’s usually the basics that get overlooked and lead to issues. Subsequent chapters talk about items like the pitch deck and executive summary that should be prepared as well as the motivations of venture capitalists. Still, this was a good reminder of the value in spending time researching the specific firm you are approaching to find out what unique requirements or motivations they may have instead of assuming all firms are the same.
- “Make sure you know who you are dealing with, what their approach is, and what kind of material they need during the fundraising process.”
The book talked extensively about the role of lawyers in the negotiation process and the impact they can have on both the terms of the deal and the VC/entrepreneur relationship once a deal is closed.
- “In addition to helping negotiate, a great lawyer can focus the entrepreneur on what really matters.”
- “Never forget that your lawyer is a reflection on you. Your reputation in the startup ecosystem is important, and a bad or inexperienced lawyer will tarnish it. Furthermore, once the deal is done, you’ll be partners with your investors, so you don’t want a bad or inexperienced lawyer creating unnecessary tension in the financing negotiation that will carry over once you are partners with your investors.”
- “At the same time the you don’t want an inexperienced lawyer creating unnecessary tension in the negotiation, don’t let a VC talk you out of using your lawyer of choice just because the lawyer isn’t from a nationally known firm or the lawyer rubs the VC the wrong way. This is your lawyer, not your VC’s lawyer. That said, to do this well, you need to be close enough to the communication to make sure your lawyer is being reasonable and communicating clearly and in a friendly manner.”
Developing a Business Plan
All plans change as soon as they are implemented. Therefore, the value isn’t necessarily in the final product. The true value comes from all the insights developed by conducting thorough and detailed planning. Identifying things like planning assumptions, regulatory constraints, and resource limitations are crucial for developing the structure of the plan, which allows you to effectively adapt the plan as the environment changes. I thought the following sections highlighted some important aspects of the business development planning process and how to present that plan to investors.
- “Focus on a length of time you want to fund your company to get to the next meaningful milestone.”
- This really applies to any founder, whether they are looking to raise a seed round or a late stage investment. While you might develop models to determine the optimal investment amount required before the company is cash flow positive, these will invariably be inaccurate. Instead, focusing on how much you need to get to your next funding round or other milestone seems to be a better approach
- “You can’t predict your revenue with any level of precisions, but you should be able to manage your expenses exactly to plan…Since your revenue forecast will be wrong, your cash flow 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 revenue.”
Describing the content of the pitch deck, they recommended addressing the following topics in 10 slides or less. I thought it was good to get this both from a founder who has successfully raised funding as well as from the authors, who are the target audience for these products and have seen a wide variety of formats and styles. While the topics are pretty straightforward, developing slides to clearly and concisely to depict all that information is pretty challenging.
- The problem you are solving
- Size of the opportunity
- Strength of the team
- Level of competition and your competitive advantage
- Your plan of attack, milestones, and current status
- Summary financials and use of proceeds
The following are some words of wisdom I made note of:
- On vetting your VCs:
- “The best VCs will give you… a list of all the entrepreneurs they’ve worked with in the past and ask you to pick a few for reference checks. The best reference checks are ones you can do where the company went through hard times…as you will learn from these how the VC handled messy and adversarial situations.”
- On closing a deal:
- “If a VC passes on a deal with you…do your best to politely insist on feedback as to why. Don’t worry that someone is telling you that your baby is ugly. Ask for the feedback, demand it, get it, absorb it, and learn from it.”
- “When signing a term sheet, always ask your VC whether the terms have been approved by the partnership or if there is another approval step in the process.”
- On information rights:
- “Feel free to insist on a strict confidentiality clause to accompany your information rights.”
- On no-shop agreements:
- “In all cases, the entrepreneur should bound the no-shop agreement by a time period. This makes the commitment bidirectional – you agree not to shop the deal; the VC agrees to get things done within a reasonable time frame.”
- “As an entrepreneur, you should also ask that the no-shop clause expire immediately if the VC terminates the process.”
- On negotiating:
- “As for which deal terms matter, we’ve talked previously about economics and control. We’d suggest that any significant time you are spending negotiating beyond these two core concepts is a waste of time. Pick a few things that really matter – the valuation, stock option pool, liquidation preferences, board, and voting controls – and be done with it.”
- “One successful negotiation tactic is to ask VCs up front, before the term sheet shows up, what the three most important terms are in financing for them. You should know and be prepared to articulate your top three as well. If the VCs are pounding hard on a point that is not one of their stated top three, it’s such easier to call them out on that fact and note that they are getting most or all of their main points.
- “Unless you are a very experienced negotiator, we suggest an order where you start with some important points that you think you can get to yes quickly. This way, both parties will feel good that they are making progress toward a deal…Then dive into the minutiae.”
- On basic legal issues:
- “Realize that even if you pay for the 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.’”
- “If you are not going to raise any VC or angle money, an S Crops is the best structure as it has all the tax benefits and flexibility of a partnership – specifically a single tax structure versus the potential for the double tax structure of a C Corp – while retaining the liability protection of a C Corp.”
- “If you are going to raise VC or angel money, a C Corp is the best (and often required) structure.”
- If you don’t 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.”
- “The Entrepreneur’s Guide to Business Law” by Constance Bailey and Craig Dauchy