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...